Political turmoil pummels Turkish lira

Market turmoil in Turkey worsened this week. The Turkish lira has recently plunged to a series of record lows against the US dollar, amid fears over political instability and foreign money fleeing the market.

It hit yet another low – of 2.27 to the dollar – after the central bank decided against raising Turkey’s key interest rate (which could have halted the slump by raising the yield on Turkish assets and making them more attractive to buyers). Turkish stocks are down by 30% from their 2013 high.

What the commentators said

The arguments for a rate rise were clear, said Daniel Dombey on the Financial Times website. Inflation at 7% or so is well above target. The current-account deficit of around 7% is unsustainable and the currency has weakened “far beyond” the central bank’s expectations. “But this is Turkey.”

Prime Minister Recep Tayyip Erdogan has become increasingly authoritarian and paranoid as a corruption scandal has engulfed his administration, said Dombey. He wants to keep rates low to bolster growth in an election year, and has put pressure on the central bank to do so.

As a result the bank has “resorted to various intricate and esoteric intervention and liquidity measures”, such as tweaking interbank rates to tighten policy, said Richard Barley in The Wall Street Journal. But all of these “have failed to stop the rot”.

Previous bouts of lira weakness have only been stopped by “hefty rate increases”. It’s hard to see how the central bank can resist market pressure to push rates higher for much longer.

By delaying the inevitable, added Capital Economics, the bank will end up having to hike rates all the more aggressively in the future, worsening the squeeze on growth.

In the meantime, said Delphine Strauss in the Financial Times, the question is “how far Turkish business with debts denominated in foreign currencies can withstand more falls in the lira, and how far foreign investors will tolerate them” – before fleeing and making the crisis even worse.

Merryn

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