The Turkish lira touched another new record low of 9.975 against the US dollar on Thursday after a rising US inflation exacerbated investors’ worries about the currency already hobbled by the central bank’s premature rate cuts. The lira has lost two-thirds of its value in the past five years, and now it is closer to the psychological threshold of 10 versus the greenback. The local currency has been the worst performer so far this year among emerging economies.
Despite the double-digit inflation, the Central Bank of the Republic of Turkey has cut rates by 300 basis points since September to 16% and promised further albeit smaller rate cuts in the coming months. Economists polled by Reuters expect the central bank to reduce rates by 100 bps next week to 15%. The country now has a deeply negative real rate with real yields expected to plunge to negative 500 or 600 basis points, a red flag for investors.
The depreciation, along with burning red hot inflation, is eating into the incomes of Turks. Food prices in Turkey were up almost 30% year-on-year in October. The overall consumer price inflation was 19.9% last month and has been double-digit in most of the past five years. Deutsche Bank expects Turkey’s headline inflation to stand at 19.5% by the end of 2021 and would stay above 20% in the first half of 2022.
