Turkish lira recently hit a fresh low of 7.95/USD, and economists expect the embattled currency to weaken further to 8.5/USD. For reference, the lira was traded 3.77/USD at the start of 2018. Analysts said that the currency crisis was caused by a political intervention which eroded the credibility of the central bank’s policy. The Central Bank of the Republic of Turkey (CBRT) raised the benchmark interest rate to 10.25% from 8.25% in September to support the currency and rein in double-digit inflation.
However, investors are concerned about President Recep Tayyip Erdogan’s unpredictable policies. Erdogan believes that high interest rates create high inflation, which is contrary to widely-known conventional economic theory. Last year, the president ousted a central bank chief after criticising the central bank’s reluctance to lower borrowing costs, a move that raised doubt in the central bank’s independence.
Moreover, Turkey’s foreign policy is increasingly becoming interventionist. The country is involved in some military conflicts and territorial disputes including in Syria, Libya, and recently in the Armenia-Azerbaijan conflict over the breakaway region of Nagorno-Karabakh. Analysts have warned that aggression increased uncertainty and scared investors away. There is also the threat of potential US sanctions after Ankara proceeded with plans to test its recently-purchased Russian-made S-400 air defence system, against protestations from Washington and other NATO allies.
Economists at Barclays said that the current viable option was to increase benchmark interest rates to help stem the currency’s depreciation. They also expect CBRT to raise interest rates again in the next policy meeting this month. Given the country’s nearly-depleted foreign reserves, other analysts believe and suggest that the only way out of the current rout is seeking assistance from the IMF. However, Erdoğan has also long told the Turkish people that the country will no longer seek help from international institutions like the IMF.
