Turkey’s currency crisis escalates before a rate cut is possible

Turkey’s currency crisis deepens in the lead up to Thursday’s central bank meeting, when officials may bowing to the pressure to continue cutting interest rates despite soaring inflation.

Previous rate cuts ordered by Turkish President Recep Tayyip Erdogan have caused a collapse in the Turkish lira in recent months. The coin has lost 40% of its value against the dollar since September, making it one of the worst performing investments in the world.

In the hours leading up to the meeting, the lira fell another 2.4% – surpassing 15 lira to the dollar for the first time. The crisis has left tens of millions of Turks poorer, fueled protests and eroded popular support for Mr.

Turkish investors and residents have been selling the lira in recent days in anticipation that the central bank will once again cut interest rates when it releases its monetary policy statement at 6 a.m. local time. ET. In a series of rate cuts in recent months, the bank lowered its one-week repo rate to 15% from 19% in early September.

Mr. Erdogan opposes higher interest rates, believing that they cause inflation – the opposite of what economies around the world have historically experienced. Earlier this week, the country’s new finance minister told a Turkish news agency that the central bank would not raise interest rates and voiced support for the president’s unorthodox approach.

Economists and investors expect that further cuts in interest rates will cause the currency to depreciate. Economists say the reduced purchasing power of Turks could eventually lead to a recession, even a recession.

“The market has gone beyond giving signals. Selim Sazak, a researcher at Ankara’s Bilkent University who advises a Turkish opposition party, said it was right to yell at the government not to do this anymore.

The weakening lira is causing inflation, which increases the cost of importing essentials such as medicine, some food items and natural gas, denominated in dollars and euros.

Official data for November shows inflation in Turkey reaching 21.3% from a year ago, although analysts estimate it is more likely.

The depreciation of the Turkish lira has weakened the purchasing power of the people of this country.


Erhan Demirtas / Zuma Press

In recent years, Turkey has repeatedly cut interest rates as a measure to boost growth, only to end up raising rates sharply when inflation gets too high. Foreign investors are concerned that the current currency crisis could be prolonged and no one in Mr. Erdogan’s inner circle is recommending a rate hike. Mr. Erdogan has fired a series of central bankers and other high-ranking officials who stood in his way.

“It’s too hard to imagine a change in the current situation, different from previous situations,” said Kieran Curtis, an emerging market fund manager at Aberdeen Standard Investments. “There is often an argument that interest rates need to rise by the time we reach lira weakness.”

As recently as Monday, Turkey’s central bank intervened in the market, selling foreign currency reserves and buying lira, in an attempt to prop up its currency in what it sees as a “unfair price formation in the exchange rate.”


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The intervention has alarmed investors, who estimate that Turkey’s central bank has more foreign currency liabilities than assets, leaving it with insufficient strength to stabilize the lira. Haluk Burumcekci, an economist based in Istanbul, estimates the central bank’s foreign currency position has fallen by a net $5.5 billion this month, of which it has worked to stabilize the lira.

Turkish companies and banks hold significant foreign currency liabilities, which have become increasingly difficult to repay as the lira plummets. S&P Global Ratings changed their outlook for Turkey from stable last week. The rating agency noted that recent rate cuts and a falling lira are likely to continue to drive inflation.

Write letter for Caitlin Ostroff at caitlin.ostroff@wsj.com and Jared Malsin at jared.malsin@wsj.com

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Ian Walker

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