Daily Outlook

As inflation jumps, Turkey faces the prospect of another currency crisis

Turkey’s lira this week slipped to its weakest level since hitting a record low in early May after inflation for the month of June was reported at 12.6%, a figure that topped economists’ expectations. With rapidly shrinking foreign reserves to prop up the currency, inflation and currency devaluation are showing no signs of a turnaround, analysts say. The lira is still “overvalued” right now even despite its current weakness, Can Selcuki, managing director of Istanbul Economics Research, told CNBC this week, citing rising inflation and the government’s dearth of reserves. June’s inflation figure was up from 11.4% in May, and the highest since August of 2019, rising steadily from 8.6% last October. “Add to this, the increasing foreign denominated debt, it seems like the lira will depreciate again in the coming months if fiscal policy doesn’t intervene,” he said.

Economists broadly agree that stemming rising inflation requires higher interest rates. Turkish President Recep Tayyip Erdogan disagrees, a long believer in the economically unorthodox view that raising interest rates is inflationary. He favors cutting rates in order to boost growth and spending, particularly after the country of 82 million was hit hard by the coronavirus pandemic — which among other things has slashed its tourism for the year, a major provider of employment and foreign currency.

Turkey’s central bank, widely seen by investors as heavily influenced by Erdogan, kept its benchmark interest rate unchanged at 8.25% during its last monetary policy decision in late June, after nine consecutive reductions from an eye-watering high of 24% for the first half of 2019. The lira hit a historic low in early May at 7.269 per dollar. The greenback is up 15.36% against it year to date.

As inflation jumps, Turkey faces the prospect of another currency crisis, CNBC, Jul 8

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