Turkish lira flounders amid govt inaction 

Turkish lira flounders amid govt inaction 

Turkey’s overdue move to raise interest rates in an attempt to rescue the lira has failed to convince investors of the independence of its central bank ahead of national elections on June 24. 

Today (Friday), aiming to ease market fears over its monetary policy and inflation, Deputy Prime Minister Mehmet Simsek announced that Ankara would not step back from a rules-based economy and that its central bank would “deliver additional reaction if needed”, hinting at further rate rises.

Turkey has been especially vulnerable to the rising dollar because the country imports so much more than it exports.

At 6.5 per cent of gross domestic product, its current account deficit is one of the world’s widest. 

The central bank this week hiked rates by 300 basis points to 16.5 per cent, amid a currency crisis and double-digit inflation. Analysts called it the “bare minimum”. 

President Recep Erdogan, who has called interest rates “the mother of all evil”, has refused to lift rates to curb inflation, which in April was at 10.85 per cent. UBS said the hike “should help in stabilising the lira in the short term”. 

The inflation rate has been well above the central bank target of 5 per cent.

Price increases have been accelerating and Ankara has made things worse by running an expansionary fiscal policy and issuing corporate tax exemptions, and the central bank has not raised interest rates sufficiently to keep the economy from overheating.

And Erdogan hinted last week that if he won the presidential and parliamentary elections next month, he might end the central bank’s independence. Investors fled, driving the lira and government bonds to new lows. 

“Looks like Erdogan got the message — Simsek been told to go out and do whatever it takes to stabilise the market,” said Timothy Ash of Bluebay Asset Management.

Before the rate rise, the lira was at a recent low of 4.9 to the dollar, down 20 per cent this year, according to Reuters.

“It’s really an urgent problem about the central bank credibility and… the president steps in and casts further doubt on that,” said James McCormack at Fitch Ratings. “We’ve had issues with the central bank and their policy credibility over the past couple of years.”

David Shipley concluded for Bloomberg: “(T)his is not enough. Erdogan should fully endorse the central bank’s new policy course. Even more important, he needs to commit to restoring the bank’s complete independence if he is re-elected. Turkey’s central bank can effectively fight inflation only if the president leaves it alone.”



The cost of living has been rising for Turks. Picture credit: Eurasia Times 

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