Turkish Lira – What’s all the fuss?

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Turkish Lira – What’s all the fuss?

The Turkish Lira, a currency which does not often gain the attention of financial reporters, has grabbed the headlines this past week.

On Wednesday, the currency tumbled to a record low against the US dollar with concerns growing over the country’s overheating economy. Turkey’s President, Recep Erdogan, insisting on personally interfering in monetary policy matters while claiming that Turkey’s central bank is independent is not helping.

The severity of the devaluation of the Lira is illustrated by the chart below. It is plain to see that the currency was already under downward pressure. However, in the wake of recent US interest hikes and economic growth in the US improving, the US dollar’s recent bout of strength has exacerbated the pressure on many emerging market currencies; especially those currencies like the Lira with large trade and budget deficits to defend and growing levels of international debt.

Turkish Lira / US Dollar Exchange Rate

Source: Bloomberg, 24 May 2018

In the wake of the crisis, Turkey’s central bank having previously resisted rate rises (possibly due to Erdogan’s influence), increased its benchmark lending rate from 13.5% to 16.5%. The currency climbed 2% higher following the announcement, however, it remains 20% lower than at the start of the year. This reflects fears that Erdogan’s autocracy may further undermine monetary policy measures needed to restore confidence in the currency backed up by an independent central bank.

Those who know the region well have been calling for higher interest rates to bring inflation under control, which currently stands at 10.9%. This requires moderation in the pace of annual GDP growth which has been a key driver of the need for tighter monetary policy.

While the central bank’s intervention will not solve all of the problems it is a step in the right direction. Left unchecked the central bank makes the point that “the current elevated levels of inflation and inflation expectations continue to pose risks on pricing behaviour”.

However, in what is unhelpful, Mr Erodgan said he planned to take more control of the country’s finances. He has in the past described himself as an “enemy of interest rates”. These comments come in front of next week’s elections.

This week, as the pressures have intensified, the President attempted to calm matters by tweeting his full support for the country’s ‘independent’ central bank. He also pointed to previous periods of economic turmoil in Turkey saying, “none of Turkey’s macroeconomic problems are insurmountable. We’ve fixed problems in the past, we can do it again”. His rationale seems to be that his soothing words will clear the cloud hanging over the economy – what’s all the fuss about!

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