On Wednesday, there was a more than 2% decline in Turkey’s Lira in light of increasing concerns about depleted official reserves and rising inflation. This is likely to get worse as Turkish President Tayyip Erdogan announced this week that they would reduce interest rates. On December 20th, the Turkish Lira had fallen to a value of 18.4 against the dollar, which was a record low. This happened in a currency crisis that had been brought about due to unorthodox reduction in the interest rates. On Wednesday, Lira came close to this historic law, as it fell to about 17.15 against the US dollar.
The Turkish currency has already declined 23% in 2022 so far and has suffered losses in 12 sessions out of the last 14. Last year, the currency had recorded a loss of 44%. Households in Turkey have become badly strained because of the fall in the currency, combined with a whopping inflation of 73%. This comes just ahead of the elections in the country that are scheduled for mid-2023. The latest round of weakness in the Turkish Lira came after the meeting of the cabinet on Monday in which the president said that they would not raise rates.
Instead, he stated that they would continue cutting down interest rates because of the high cost of living. Market analysts said that the best scenario for Turkey was an economic soft landing, but it would definitely not be easy to achieve. Since the currency crisis hit in December, the central bank has been offering the lira its support. This has pushed traders to call it a ‘dirty float’ or managed market. The government wants to achieve sustainability in the exchange rate, as import payments have resulted in a demand for corporate foreign currency.
The problem is that if the government continues to keep the lira strong, it would mean that they would not be able to maintain control of the exchange rate for long. Analysts said that the latest weakening in the lira was a good sign because it would ensure exchange rate sustainability. Not doing this would have significant consequences in the future. The net foreign reserves of the central bank had reached $12.2 billion by the end of May, but deduction of swaps pushes them in the negative category. In emerging markets, Lira has had the worst performance in the last few years.
This is mostly because of the monetary policy and economic concerns under the current government. There was a fall of 3.4 cents in the sovereign dollar bonds, as they reached their lowest since March 7thbecause of the sharp decline in Lira. Analysts said that while the news of reducing interest rates may have caused a weakness in Lira, there are plenty of other reasons behind it as well. A fall in the foreign reserves of the central bank, an increasing trade deficit and high external financing costs have all put pressure on Lira. Now, rising inflation is also adding to the problems.