Things seem calmer in the crisis surrounding the Turkish lira. However, Turkey has not yet convinced the financial markets that the country wants to tackle the inflation problem in a sustainable way. That reports Business Insider.
Inflation is in August 2018 incurred up to about 18%. Long-term high inflation is a major problem, as the economic downturn in Venezuela and Zimbabwe shows. Due to high inflation, the exchange rate of the lira is under pressure. Many Turkish companies have borrowed money abroad and are facing payment difficulties due to the fall of the lira.
calm the market
The Turkish central bank has calmed the foreign exchange market for now. After cutting interest rates last week a big step (6,25 percentage points) increased to 24%, the exchange rate of the lira has stabilized. However, this is a temporary solution. High interest rates are bad for the economy because corporate and consumer credit more expensive Service.
Berat Albayrak, the finance minister and son-in-law of President Erdogan, wants to tackle the crisis. The minister wants to make significant cutbacks in government spending. This should lead to a reduction in the budget deficit to about 2% of gross domestic product and lower economic growth next year.
Few details
However, the plan contains few details. It remains to be seen how it will work out in practice. According to Paul McNamara, emerging markets manager at GAM, the positive thing about the plan is that the government recognizes the problem. In The Financial Times he says, "They are now concerned with how to cool the economy, rather than how to stimulate the economy."
Analysts also see the rate hike as a first step. The question is whether the bank will dare to raise further if inflation rises further; let alone bring it down in the short term. After all, Erdogan has great resistance to high interest rates. He mentioned interest earlier "the father and mother of all evil.'
Read more on Business Insider:
- Erdogan tries to avert crisis by calling for the lira to be supported
- Crisis is due to lack of knowledge about the role of the central bank
- This graph shows why a no deal is a disaster for the Netherlands
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