Turkey on track – for the next lira crisis

 

The lira does not rest. The Turkish national currency recently recorded a new all-time low against the US dollar, and it does not look much better against the common European currency. The situation is made worse by the fact that, according to media reports, state-owned commercial banks have intervened in the foreign exchange market to support the lira. Otherwise, the devaluation would probably have been even more pronounced. It is true that the past few months have been characterized by enormous challenges for the majority of currencies in the emerging markets segment. However, there are few representatives who have performed as badly as the lira since the outbreak of the Corona crisis. It is also striking that not even the brightening of global sentiment observed since the beginning of May has left a lasting positive mark on the lira. The impression that the weakness of the national currency is primarily homemade problems is therefore almost inevitable.

The Turkish central bank is at the center of criticism. The guardians of the currency around Murat Uysal are stubbornly sticking to their official key interest rate of 8.25%. Although the central bank has moderately raised the refinancing costs for commercial banks via other channels and is thus pursuing a restrictive monetary policy „through the back door“. But at the same time it is making it clear that it is not (at least not so far) prepared to work resolutely towards reducing price level increases – contrary to statements to the contrary made at the most recent interest rate meeting of the guardians of the currency. It is no secret that it is above all the fear of President Erdogan that lies behind this intransparent approach. The powerful head of state had repeatedly demanded lower interest rates in the past and recalled Uysal’s predecessor when the latter refused to comply with such demands.

There is still a chance for the guardians of the currency to change course and stabilize the lira by raising the official key interest rate. This should not be too tight, since the real reference interest rate must be brought back into positive territory. In all probability, central bank chairman Uysal would then put his job at risk. Alternatively, however, the risk of a repeat of the lira crisis of 2018 is likely to become increasingly threatening if global and national conditions do not improve noticeably. This is certainly not the case at present.

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