The Turkish lira will fall again in 2018. That won't change as long as the central bank doesn't make an effort to get the raging inflation under control.
Initially, the Turkish economy seems to have the wind at its back. The country is heading for growth of 4%, while political tension has eased somewhat. Behind this picture, however, lies a major and growing problem. Inflation remains stubbornly high. In November 2017, the highest level was reached since 2004. Since then, inflation has fallen somewhat: from almost 13% to more than 10%. That is still twice as high as the 5% that the Turkish central bank is aiming for.
Political motives
In other countries, central bankers had already raised interest rates long ago in order to push inflation down. In Turkey takes the bank however, adopt a wait-and-see attitude. This is because, in addition to economic arguments, political motives also play a role. Presidential elections will be held in November next year.
Incumbent Prime Minister Recep Tayyip Erdogan is keen not to hinder economic growth for the time being. The chance is therefore small that an interest rate hike will soon occur, which would lead to consumers and companies seeing interest charges rise.
Free fall of the lira
High inflation is creating imbalances in the Turkish economy. The current account deficit stood at $50,6 billion in January. In the same month of last year, that was still $33,6 billion. This outflow plays an important role in the free fall that the Turkish lira is currently experiencing.
The currency has fallen by more than 2017% against the euro since the end of 8. Today the lira is only worth €0,20, while 10 years ago it was still more than €0,50. Several investment banks warned this month that the Turkish currency is in danger of entering a negative spiral.
This is how you stop a currency crash
It is now important to stop the decline; this can be done in 2 ways. As investors' risk appetite increases, more investors will take the dangers for granted and put more money into Turkish companies in search of higher returns. Given the mounting tension in the financial markets, this is very small.
The same goes for the other option: an interest rate hike by the central bank. The door will (probably) only be slightly ajar if the election victory Erdogan can no longer miss. It is therefore possible that in a few years you will only get a dime for a lira.
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