A monetary train-wreck in Turkey

published 20 November 2020

Turkish shares have rallied on hopes that a period of monetary misrule is coming to an end. Inflation is at 12%, but strongman leader Recep Tayyip Erdogan believes in the “bizarre” idea that higher interest rates cause inflation rather than curb it, says The Economist. The central bank has thus resisted desperately needed rate hikes this year, instead “squandering more than $100bn” in currency reserves in a forlorn attempt to defend the currency over the summer.

The Turkish lira has lost more than 60% of its value against the dollar over the past five years owing to poor monetary policy. Yet this month has seen the replacement of both the central bank governor and finance minister. The lira has rallied on hopes that they will usher in a period of more sensible policy, while local stocks are up by 14% so far this month.

Turkey’s economic management has long been a “train-wreck”, writes Craig Mellow in Barron’s. A buoyant European economy and plenty of cash from tourism helped Turkey dig its way out of its last currency crisis in 2018, but this year tourists will be staying at home. Erdogan didn’t learn his lesson from that episode and soon returned to “pumping credit…revving inflation and depressing the lira again”, precipitating the current problems. The recent stockmarket jumps show that the brave can make a buck in Turkey, but it looks more like gambling than investing.