The Turkish lira gained sharply against the US dollar yesterday, rising by more than 2.5 per cent against the US dollar as its central bank continued its efforts to stem a steep decline in value.
A dollar bought as little as 4.56 lira at the Turkish currencys strongest point today, after last week reaching a value of 4.92 lira before an emergency rate hike.
What is causing the Turkish liras volatility?
Investors in the emerging market currency have been badly stung during 2018 with a strengthening dollar piling on pressure. Meanwhile, soaring inflation – which rose to almost 11 per cent in April – and serious concerns over the rising current account deficit have exacerbated the currency weakness, prompting the Central Bank of the Republic of Turkey to take emergency action to prop up the currency at the end of last week.
Yet the main trigger for the recent dramatic sell-off has come from the political sphere rather than fundamental economic issues with interference from President Recep Tayyip Erdogan. The risk of a politicised central bank sent the lira to historic lows last week – and it remains down by 28 per cent over the past year.
Where does President Erdogan stand?
The strongman leader has previously expressed a desire for low rates which would keep the foot on the growth accelerator, and he alarmed investors this month by suggesting he will take much more control of monetary policy if he wins upcoming presidential elections.
The country goes to the polls on 24 June for presidential and parliamentary elections, with local elections following in March 2019. Further political uncertainty as Erdogan tries to maintain his so-far firm grip on power is likely, while the temptation to interfere further with the central bank could rise if economic growth falters.
What has the central bank done to fight back?
The central bank on Thursday hiked its key interest rate by 300 basis points to 16.5 per cent to try to keep a lid on inflation and attract investor money back into the lira – economists welcomed a “long overdue” hike. Today it announced further efforts to simplify its monetary policy structure and making its one-week repo rate the main policy measure, in a further signal it wants to pursue an orthodox monetary policy.
The bank said it will “continue to use all available instruments in pursuit of the price stability objective” and continue to hold a tight grip on the monetary taps until it sees a “significant improvement” in the outlook for inflation.
What is the way out of the crisis?
Erdogans advisors advocating low interest rates seem to have been pushed back for now, but the President has not given up unorthodox means to help boost the currency. In an election rally over the weekend he called for Turks to use their dollar and euro savings to buy lira, according to Reuters.
Yet the central bank in Turkey and in other emerging market economies – most notably Argentina – may be powerless even with the help of its most deep-pocketed patriots in the face of the mighty US Federal Reserve, which remains intent on tightening monetary policy, encouraging funds to flow to the US.