Turkey’s plummeting lira could have further to fall

The Turkish lira has depreciated rapidly since the turn of the year, recently notching its weakest ever level against the dollar, but analysts suggest the risks are still skewed to the downside.

Only two years after its last currency crisis, the lira was changing hands at just over 7.31 to the dollar on Thursday, with the greenback having gained more than 23% against it year-to-date.

Central to the currency’s weakness has been Turkey’s unconventional monetary and fiscal policy moves and the diminished independence of its central bank (TCMB). President Recep Tayyip Erdogan sacked former governor Murat Cetinkaya last July in a dispute over high interest rates, prompting an aggressive easing cycle from rates of 24% to 8.25% over the past year.

The government has long intervened to stabilize the currency, but now faces an external financing gap, limited reserves, a deteriorating inflation outlook and rising foreign currency deposits locally, all of which is expected to exert further downward pressure.

Goldman Sachs has raised its three-month USD/TRY outlook to 7.75, but said the medium and long-term direction will depend on the path of policy.

Analysts broadly see a rate hike as necessary to stem the bleeding, but Erdogan’s staunch opposition could prove a sticking point. Ash suggested that as in 2018, Erdogan will likely only agree to a hike of the base rate if the lira is in freefall.

Turkey’s plummeting lira could have further to fall, analysts say, CNBC, Aug 13