On Tuesday, there was a fall in the Turkish Lira against the US dollar, which brought it down to 17.579. The currency was brought down to its lowest levels recorded after there had been a currency crisis back in December. This was because of a strong US dollar and worries about the high domestic inflation.

Lira crisis

Last year, the Lira had seen a historic crash after which the central bank had stepped in to stabilize the currency via its foreign exchange reserves. Last year, the currency had plunged by almost 44%, which made it the worst performing currency in emerging markets (EMI).

Even now, the Turkish currency is still down by 25% for the year. The crisis in the currency was triggered because of unorthodox rate reductions in the interest rate, which had driven domestic inflation to levels of 80% in June.

Market analyst said that many investors have become fed up of Turkey because the country seems to be doing the exact opposite of what should be done where its macroeconomic policy is concerned.

The measures

Since the crisis occurred, the central bank of the country and the government have ramped up measures in recent months to reserve the fall in the exchange rate. This includes implementation of an FX-protected deposit scheme backed by the state. Plus, restrictions have also been imposed on lending to companies that have foreign currency cash of more than $1 million.

According to market analysts, the country already has external imbalances and high inflation, but now the FX deposit scheme is also leading to fiscal weakness. They said that the policies have been trying to buy some time and to get things back to normal, so FX stabilizes and tourism returns, but it has not been working.

The Turkish central bank is scheduled to meet on Thursday for a monetary policy meeting, but the interest rate is expected to stay at 14% for a sixth straight session, even though there has been a global tightening and annual inflation has hit a high of 24 years.

Currency interventions

In June and the beginning of July, the fall of the Turkish Lira was controlled via currency interventions, which kept it at a value of 17.35 against the dollar. However, analysts said that the central bank’s limited foreign reserves, the high prices of raw materials and agricultural products and rising inflation is making market participants angry at attempts of stopping the Lira’s fall.

After the correction in the previous month, it is unlikely that bear markets would retreat until the Turkish currency comes down to 18.30. The inflationary pressures in Turkey are even higher this year, as opposed to the previous one. This is because the country depends heavily on imports of metals, energy, and agricultural products.

Analysts said that the question of the Lira hitting record lows is not if, but when. It is expected that there would be a reduction in inflation by the end of the year, as it would come down to 70%.

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