Turkey is one of the many countries with a currency crisis. It’s not just Turkey that is experiencing this, but an increasing number of emerging markets are suffering from similar issues due to their reliance on capital inflows and limited recourse in case things go awry. Investors should be aware of how these crises can affect them before trading out of currencies as risk management moves into overdrive across world markets
The “Turkey’s Currency Crisis Escalates Ahead of Possible Rate Cut” is a story about the Turkish Lira. The currency has been in decline since last year and was trading at 3.8 to the US dollar on Wednesday. This article talks about the latest developments in Turkey’s currency crisis, including possible rate cut from central bank.
Turkey’s currency crisis has worsened ahead of a central bank meeting on Thursday, when officials are expected to cave in to pressure to begin interest rate cuts despite rising inflation.
The Turkish lira has been on the decline in recent months as a result of previous rate cuts sought by Turkish President Recep Tayyip Erdogan. Since September, the currency has lost 40% of its value versus the US dollar, making it one of the poorest performing assets in the world.
The lira fell another 2.4 percent in the hours running up to the conference, passing 15 lira to the dollar for the first time. Tens of millions of Turks have become poorer as a result of the crisis, which has sparked demonstrations and eroded public support for Mr. Erdogan.
In recent days, investors and Turkish citizens have dumped the lira, anticipating the central bank to cut rates once again when it issues its monetary policy announcement at 6 a.m. ET. The bank has decreased the crucial one-week repo rate to 15% from 19% in early September, as part of a string of rate reduction in recent months.
Mr. Erdogan hates higher interest rates because he believes they fuel inflation, which is the polar opposite of what has happened in other countries throughout history. The country’s new finance minister told a Turkish news outlet earlier this week that the central bank would not increase interest rates and backed the president’s unconventional strategy.
Economists and investors believe that future interest rate cuts will send the euro down another notch. Economists believe that Turks’ declining buying power will ultimately lead to a downturn in the economy, if not a recession.
“The market has progressed beyond signaling. It’s basically yelling at the government to stop,” said Selim Sazak, a research fellow at Bilkent University in Ankara who advises a Turkish opposition group.
The falling lira is fueling inflation by raising the cost of importing essential products denominated in dollars and euros, including as medications, some foods, and natural gas.
Turkey’s inflation rate in November was 21.3 percent higher than a year ago, according to official figures, but experts believe it is likely higher.
The Turkish lira’s devaluation has decreased the country’s inhabitants’ buying power.
Erhan Demirtas/Zuma Press/Zuma Press/Zuma Press/Zuma Press/Zuma Press/Zum
Turkey has routinely slashed interest rates to boost economy in recent years, only to have to hike them sharply when inflation rises too high. Foreign investors are concerned that the present currency crisis will be protracted, since no one in Mr. Erdogan’s inner circle has suggested raising interest rates. Mr. Erdogan has removed a slew of central bank heads and other high-ranking officials for standing in his way.
“It’s simply too tough to envisage a turnaround in the present environment,” said Kieran Curtis, an emerging-markets fund manager at Aberdeen Standard Investments. “By the time we reached to this degree of lira weakening, there was generally someone arguing that interest rates needed to go up.”
Turkey’s central bank engaged in the market as recently as Monday, dumping foreign-currency reserves and purchasing the lira in an attempt to prop up its currency owing to “unhealthy price patterns in exchange rates.”
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Investors are anxious about the intervention because they believe Turkey’s central bank has more foreign-currency obligations than assets, leaving it with little capacity to keep the lira stable. The central bank’s foreign-currency position, according to Haluk Burumcekci, an economist based in Istanbul, has declined by a net $5.5 billion this month as it attempted to support the lira.
Turkish corporations and banks have large foreign currency loans, which are becoming more difficult to repay as the lira falls in value. Last Monday, S&P Global Ratings changed its outlook for Turkey from stable to negative. Recent interest rate decreases and the lira’s devaluation, according to the ratings agency, are anticipated to drive inflation higher.
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