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Turkish Lira falls 30% despite efforts by the Turkish Central Bank

The Turkish Central Bank announced last week that it would intervene to stop the fall of the Turkish lira, which has lost some 30% of its value against the dollar in one month.

The Turkish Lira currency has continued to tumble in recent weeks, as a result of a monetary policy decreed by President Recep Tayyip Erdogan and deemed irrational by many observers.

The Central Bank lowered its key interest rate again in November (from 16 to 15%), for the third time in less than two months, thus running the risk of fuelling inflation which is already close to 20%. This has led in turn to a dramatic drop in purchasing power, as the government-induced inflation is driving prices off the roof.

The currency’s volatility has surged to record levels in more than 20 years. The USDTRY GARCH Volatility Analysis currently shows a 1 monthly prediction at 35.08 %.

Who said what?

Moody’s: “We expect consumer price inflation, which stood at 21.3% in November, will accelerate to around 25% or even higher in the coming months” – Reuters.

William Jackson, chief emerging markets economist at Capital Economics: “We don’t see policymakers looking to reverse course, trying to get investors back on board”- WSJ.

Guldem Atabay, Istanbul Analytics: “An experiment is being conducted and Erdogan is in charge of this experiment. Interest rates will be brought down as far as they can” Ekathimerini.

Lira Negative outlook

The S&P rating agency was pessimistic on Saturday about the future development of the Turkish economy and its public finances. While S&P keeps Turkey’s credit rating unchanged for the time being, the outlook has been revised downward to negative.

Turkey’s central bank has repeatedly lowered the interest rate, whereas when inflation is high it is customary to make borrowing more expensive.

The fact that the national currency is losing value is dangerous for Turkey, according to S&P Global. Much of the country’s debts are owed by foreign creditors, and it becomes more and more expensive to pay them off when the lira is so low. S&P maintains Turkey’s rating at B + for the time being, which means lenders are at significant risk.

Good news from the Gulf?

Turkey has proved to be a reliable partner for Qatar, especially during the blockade imposed by its Saudi and Emirati neighbours in 2017 when it kept shipping supplies, consumer goods and troops to support the Qataris.

In what is obviously a quid pro quo, Qatar has been providing $15bn in currency swaps for Turkey since 2020, in the backdrop of high lira volatility. In addition, two heads of a state visits in the past month have led to investment pledges, the details of which are yet to be revealed.

There is good reason to expect that Qatar, already being the second-largest investor in Turkey, could be the short-term answer to the country’s current economic chaos.

Stay tuned on all Axiance channels for currency market updates from our in-house analyst and Trading Central alerts.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances or needs.

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