Lira further under pressure this year?

The president of the Turkish central bank is likely to repeat himself in a few months with a controversial policy choice. He doesn't have much choice, as long delays will cost him his job.

With some things you can already see that things cannot end well. For example, if someone on a full terrace slides his chair back the moment a waiter with a full tray passes behind him. That happens in a split second, but with Sahap Kavcioglu it is clear months in advance that there is a good chance that things will go wrong. Kavcioglu has been the president of Turkey's central bank since March 20. In recent weeks, he has hinted several times that he will cut interest rates over the course of the year. And the financial markets think that's a very bad idea.

Hyperinflation
Usually an interest rate cut is a means to give the economy a boost and to fuel inflation somewhat. However, the latter is not necessary at all in Turkey: inflation is currently above 17%. The official target of the Turkish central bank is 5%. An interest rate cut means that inflation will remain very high for the time being. This is very annoying for the population, who sees the prices of all kinds of items rising rapidly. Under pressure from Prime Minister Recep Tayyip Erdoğan, Kavcioglu will most likely choose to lower interest rates in the future. That is what drives economic growth, which for Erdoğan outweighs tackling inflation.

It hurts here
Kavcioglu has little choice in this regard. If he waits too long with an interest rate cut, he will undoubtedly be replaced in no time. Erdoğan is rapidly wearing down central bank presidents. Since July 2019, there have already been three position changes. And while Kavcioglu has been in office for less than 4r months, his current reign is almost as long as that of his predecessor. Nowhere is the dubious monetary policy of the Turkish central bank more felt than in the currency world. There, a lira is worth less than 10 cents. 5 years ago it was still 30 euro cents. And 10 years ago you even got 43 euro cents for a lira.

sun holiday
Ultimately, Turkey cannot avoid putting its financial affairs in order. However, that moment was pushed back a bit last month, as the country expanded a swap deal with China from $2,4 billion to $6 billion. This gives Turkey access to additional foreign currency to support its own currency. This is badly needed, because the own reserves are largely exhausted after a few disastrous interventions in 2019 and 2020. Until the bottom of the treasury is reached, Erdoğan will stick to his destructive policy and the lira will slide even further. That is painful for the population, but a windfall for anyone who wants to book a sun holiday to Turkey.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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