Turkey is in a vicious circle of galloping inflation and currency devaluation, said a leading emerging markets analyst as the pound widened its losses against the dollar this year.
The pound traded down 1.5% at $ 16.34 at noon on Thursday in Istanbul. It has lost 19% in 2022 after a 44% drop in value last year. The currency was trading at 7.44 per dollar in early 2021.
Turkish authorities have abandoned a recent foreign exchange intervention policy and are now trying to manage the pound, said Tim Ash, a senior emerging markets analyst at BlueBay Asset Management in London.
“With 70% inflation, they have to manage a steadily rising pound or face a huge real appreciation,” Ash said. “They are in a vicious cycle of inflation-currency devaluation.”
The Turkish pound fell against major currencies after the central bank, acting on orders from President Recep Tayyip Erdogan, cut interest rates late last year despite accelerating price increases. Erdogan, who ousted three members of the Turkish Central Bank (TCMB) within three years, says higher interest rates are inflationary and also run counter to his Islamic beliefs.
Inflation rose to a two-decade high of 69.97% in April. The central bank has said it will not raise interest rates to defend the pound and slow inflation; Erdogan opposes such a move. He said he did not need to raise borrowing costs just because other central banks around the world did so to curb inflation. Producer price inflation in Turkey amounts to 122%.
Ash said authorities could manage the pound fall before setting a new level to defend it in the run-up to early elections. Turkey is set to hold presidential and parliamentary elections by June next year.
The TCMB monetary policy committee is scheduled to meet on Thursday. Economists do not expect any change.
Petros Kranias
Source: Capital
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