Increasing interest rates meets political opposition, contributing to the expectation of more lira weakness. Economists at ABN Amro don’t think the lira has room to recover in the near-term as the dynamics will not change in the short-term. On Monday, USD/TRY has advanced to new peaks in the 7.46 region.
Key quotes
“Increasing the main policy rate and thus supporting the currency may seem like an obvious path in the circumstances. However, the central bank under Governor Murat Uysal is under pressure to keep interest rates low, implementing policies supported by President Recep Tayyip Erdogan, who believes that high-interest rates fuel inflation. So far, the central bank has dealt with this contradiction by tightening without increasing the main policy rate. Examples include halving the overnight borrowing limits of lenders and cutting liquidity limits to primary dealers to zero, and raising reserve requirements. The question is whether these back-door channels will be enough to stop the currency’s decline.”
“The current-account deficit, fiscal deficit, weak growth and negative real yields, combined with domestic politics and concerns about the independence of the central bank are all negative for the lira. Foreign-currency reserves are low and there is not much room to intervene in currency markets to support the lira. We think at some point in time the central bank needs to take stronger action to stabilise the currency.”
“We expect more weakness in the near-term and some stabilisation followed by a recovery towards the end of this year and next year. This will also be the result of general dollar weakness.”
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