Friday, 17 August, 2018

Erdogan Surrenders to Market as Rate Rise Halts Lira's Collapse

Turkey has means to curtail currency shifts President Turkish lira 'in freefall'
Elsie Buchanan | 26 May, 2018, 01:07

Erdogan has called for low interest rates to ensure strong growth.

The lira dropped to over 4.91 against US dollar on Wednesday morning, down about 6 percent since Tuesday, before recovering some of its losses in the day, but still very prone to fluctuation.

But Jackson said if the central bank failed to tighten monetary policy "the risk of a disorderly adjustment and a sharp economic downturn - possible a recession - will mount".

The comments came alongside another warning from Fitch on Tuesday, which rates Turkey two notches higher than S&P at BB+. But they also tend to hinder economic growth by making it costlier to borrow and can arouse public discontent.

Dragging on the Turkey market outlook, the lira currency has tumbled to record lows in recent weeks and weakened by more than 20% against the Dollars so far this year and depreciated 70% over the past five years. Concerns had grown that imports would become more expensive for the Turkish people.

The lira's long period of decline has been attributed to the Turkish central bank's refusal or inability to hike interest rates as much as economists believe is necessary to strengthen the currency, the Wall Street Journal reports.

The move came after US dollar/Turkish lira exchange rate saw a historic high, climbing over 4.7500 at Wednesday's market opening. "The volatility in the exchange rate is not just about our country; it's a global problem".

Mr Erdogan has said he plans to take more control of the country's finances after the election on 24 June.

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In addition to the plummeting currency as well as high inflation and unemployment, one of the weakest points of the Turkish economy is the current account deficit and external debt.

Win Thin, Global Head of Emerging Market Currency Strategy at Brown Brothers Harriman in NY, said Wednesday's increase was the "bare minimum", and something closer to 20 percent in the top rate would be needed to calm the lira.

Ankara is hugely reliant on foreign capital and has suffered from this trend.

Turkey´s embattled lira on Wednesday lost over 3.5 percent in value to hit new historic lows against the United States dollar, as markets watched to see if the central bank will take emergency action to buttress the currency.

Jason Tuvey, an economist with Capital Economics in London, said that if the central bank "continues to bow to pressure from Erdogan and refrains from raising interest rates, that would lead to an even sharper fall in the currency".

Deputy Prime Minister Bekir Bozdag on Wednesday cast the lira's drop as a foreign plot to harm Erdogan and affect the results of the polls.

His remarks for potential interference in the Central Bank's independent policy-making mechanism produced a backlash in global markets and sent lira plunging to historic lows.

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