Ongoing inflation, a dwindling lira and tensions with America are impacting Turkish consumers and companies
August 7, 2018 – The Guardian
Turkey is facing mounting pressure to announce an emergency rise in interest rates as rampant inflation, a plunging currency and American sanctions pushes one of the world’s key emerging market countries to the brink of crisis.
Analysts said Turkey’s central bank would have no choice but to increase borrowing costs aggressively in the coming days to stem the fall in the lira, which is down by almost a third against the US dollar in the past 12 months and hit a record low this week.
The currency’s weakness has been exacerbated by the increasing tendency of Turkey’s president, Recep Tayyip Erdoğan, to interfere in the conduct of monetary policy by opposing the use of higher interest rates to cool an overheating economy.
This week’s turbulence was triggered by news that the Trump administration was considering removing Turkey’s eligibility for preferential trade treatment in protest at their imprisonment of the US pastor Andrew Brunson. The threatened loss of duty-free access to the world’s biggest market for Turkish exports would further weaken the lira by removing a crucial source of dollar inflow.
Washington has already announced asset freezes and travel bans on two Turkish ministers in an attempt to secure the release of Brunson, who is facing accusations of espionage for Kurdish insurgents and the movement of Fethullah Gülen, a US-based preacher believed to have orchestrated a coup attempt in 2016.
American officials say the charges against Brunson are false and as 10-year borrowing costs hit a record level of more than 20% on Tuesday, Ankara announced that it was sending a mission to Washington to seek a diplomatic solution to the row between the two Nato countries.
But William Jackson, chief emerging markets economist at Capital Economics, said swift action by the central bank now looked unavoidable.
Jackson said the Turkish central bank had been expected to increase a key interest rate by 2 percentage points over the coming months but it was now looking increasingly likely that this would now come in just a few days.
“However, the lira’s fall is being amplified by concerns that the central bank will not act to shore up the currency. The fact that the MPC [Monetary Policy Committee] kept interest rates unchanged at its meeting in late July, despite the rise in inflation to a 15-year high, suggested that the government is influencing monetary policy.”
The lira hit a record low of 5.425 against the dollar on Monday, a 5.5% drop in a single day, before recovering somewhat to 5.27 on Tuesday afternoon, after reports of the Turkish delegation’s Washington visit. Monday’s drop was the lira’s worst single-day slide in ten years.
The US sanctions have exacerbated a currency crisis that was already hurting Turkish consumers and businesses with loans in foreign currencies. Investors were already concerned over the country’s widening current account deficit and high foreign debt even before Erdoğan demonstrated his desire to influence economic policy by appointing his son-in-law, Berat Albayrak, as treasury and finance minister.
The central bank raised borrowing costs to support the lira in May, but after the recent election Erdoğan – a self-styled enemy of interest rates – assumed new executive powers that investors fear will compromise its independence. The president wants lower borrowing costs to fuel credit growth and economic expansion, even though inflation is running at more than 15%.