Turkish Lira Continues to Depreciate

The Turkish lira has been depreciating for the ninth consecutive day following the official indicators that have shown the war in Ukraine threatens to intensify financial pressure on the country’s fragile economy. The lira has reached 14.995 to one dollar. This year, the Turkish currency has fallen by 12 percent, following a decline of around 44 percent recorded in 2021.

President Erdoğan has ordered the central bank to reduce interest rates to stimulate economic growth to reach up to 14 percent even under accelerated inflationary conditions. Inflation reached 54.4 percent in February, the highest rate among emerging market countries.

Erdoğan has ruled out raising interest rates to slow down price increases, which some economists believe could accelerate to reach 70 percent in the coming months. Due to the Ukrainian conflict, the sharp increase in energy and commodity prices has exacerbated inflationary pressure in a country that imports almost all of its consumed energy. The surge in energy prices has also increased the trade deficit.

“Interest rates need to be higher, the lira lower; otherwise, Erdoğan will have to ‘call his friend’ to obtain some dollars to boost reserves,” said Tim Ash, a senior emerging markets specialist at BlueBay Asset Management in London. The war in Ukraine threatens to derail Erdoğan’s economic program aimed at achieving positive changes in current account balances and ensuring low-interest rates to stimulate production, exports, and economic growth.

In January, the annual volume of industrial production decreased to 7.6 percent, while it was at 14.4 percent in December. The combination of inflation and a low monetary policy is also sharply worsening inflation forecasts in the country. Annual inflation is expected to slow down to 41.1 percent by the end of the year. The lira hit a record low at the end of December, reaching 18.37 against the dollar, prompting Erdoğan to announce a scheme on December 20 to peg certain lira deposits to the dollar.