What is the cause of Turkey’s currency depreciation?
The Turkish currency has been plummeting as President Recep Tayyip Erdogan has pushed for interest rate reduction amid high inflation.
The currency struck a new low this week, trading at over 13 to the dollar, and has lost almost 43% of its value versus the US dollar since the beginning of the year.
The following are some major questions surrounding the lira’s depreciation:
Erdogan stressed that interest rates must fall this summer, taking the unconventional stance that high rates imply big inflation.
The central bank’s primary interest rate has been reduced by 400 basis points since then, raising questions about its independence. Its most recent decision, made last week, hinted at another cut in December.
The lira’s problems, though, are more serious.
Erdogan, who has fired three central bank governors since July 2019, has refused to take blame for the lira’s depreciation.
He warned that the country was in a “war of economic independence,” saying, “I oppose measures that will condemn our people to unemployment, starvation, and poverty.”
The opposition Future Party’s economic policy director, Kerim Rota, claimed the lira was seeing its biggest monthly depreciation since 1994, and the second worst in the past 40 years.
“It will be the highest if it reaches 14.25 (to the dollar) before the end of the month. It’s apparent that things have spiraled out of control “In an interview with Halk TV on Tuesday, Rota said.
On Wednesday, the Turkish currency strengthened, trading at just under 12 lira to the dollar.
While many believe Turkey’s banking industry has improved since the 2001 economic crisis, concerns regarding the impact on banks and the possibility of capital controls have arisen.
“Banks are in a better position than they were a few years ago to deal with the spillovers from a weaker lira,” said Jason Tuvey, an emerging markets analyst at Capital Economics.
However, he warned, “The risk is that the lira will continue to collapse sharply and unpredictably, causing problems in the financial sector. A credit crunch could follow, putting a damper on economic activity.” Any signs of a “flood of withdrawal requests” from foreign exchange accounts, he warned, would almost certainly lead to more draconian capital controls.
Foreign currency, primarily dollars, account for more than half of all deposits in Turkish banks.
Turkey’s stated inflation target is 5%, but it has lingered persistently in double digits for the past two years, approaching 20% last month.
Real inflation, according to opposition parties, is significantly higher than the official figures suggest.
Given. The Washington Newsday Brief News is a daily newspaper published in Washington, D.C.