The Turkish lira (USD/TRY) collapsed this week after a fiery speech by President Recep Erdogan. The USD/TRY pair jumped to an all-time high of more than 13. The same trend happened in other pairs like GBP/TRY and EUR/TRY. Now, while the Turkish lira has stabilised a bit, some analysts believe that the situation could get worse soon.
Turkish lira has been in a freefall
It is relatively easy to explain why the Turkish lira has collapsed by more than 40% this year and by more than 300% in the past 15 years.
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For a currency to remain stable, it is important for holders and investors to have confidence in the central bank. This explains why most central banks operate independently from the other arms of government.
Unfortunately, Turkey has a unique system that gives the president the mandate to hire and fire central bank officials at will. Indeed, Erdogan has used this power well. In the past few years, he has replaced about 6 central bank governors. The most recent reshuffle happened in September when he fired officials critical of rate cuts.
Subsequently, the CBRT has slashed interest rates by about 400 basis points even as inflation has surged to above 20%. In economics, the orthodox strategy for a central bank is usually to hike interest rates in a period of high inflation.
Therefore, some analysts believe that the USD/TRY pair will keep rising in the coming months even though the central bank has committed not to cut interest rates again. Since Turkey is a net importer, the devalued currency means that customers will pay more for their goods.
Analyst expects the USD/TRY to keep rising
While some analysts expect that the USD/TRY pair will retreat soon, others believe that things will get worse.
In an interview with CNBC, Can Selcuki warned that the situation will worsen in the coming months. Can is the general manager at Istanbul Economics.
He argued that consumer and producer prices will soon rise and that many businesses were struggling to set prices. He also warned about default risks on the government’s dollar-denominated debt. You can watch the interview below.
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