Turkey Lira in freefall as Erdogan’s desperate bid to contain crisis backfires badly

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The Lira has had a rough ride the past year with its value against the pound now nearly half what it was 12 months ago. Meanwhile inflation has soared with the country’s Finance Minister Nureddin Nebati predicting a peak of 40 percent this year. Today Turkey’s central bank revealed it would keep interest rates unchanged for a second month, following a string of cuts last year which saw the Lira tumble in value. While economies around the world have also been grappling with inflation the extreme situation in Turkey is linked to the key factor of President Erdogan’s unorthodox beliefs about inflation and interest rates.

Despite mainstream economics suggesting the use of interest rates as a means of controlling inflation, the Turkish president has insisted that interest rates in fact cause inflation- describing them as “the devil.”

Mr Erdogan wields considerable influence over the central bank, which is now on its fourth governor in nearly three years, leaving the bank with little room to manoeuvre.

In December Mr Erdogan announced a new set of alternate plans designed to support the tumbling Lira and achieve stability, consisting of a government guarantee on Lira deposits as well as a new mechanism to pay savers on any price changes between their Lira savings and the equivalent in dollars.

Speaking today Mr Erdogan declared: “Debate over interest rates has subsided significantly and exchange rates stabilized.”

The reality has proved rather different though with analysts suggesting the measures will not prove sufficient.

Despite a brief spike in the value of the Lira after December’s measures, it has since fallen back down again with a recent dip this week in the run up to the central bank’s decision.

Inflation meanwhile has continued unabated with waves of strike action in recent weeks as workers demand higher pay to try to keep pace with escalating prices.

Daniel Wood, Portfolio Manager, Emerging Market Debts at William Blair Investments Managements, told Express.co.uk: “The deposit guarantee scheme introduced by the government is innovative and has been successful in the short term in steadying the lira decline and has bought Turkey some time.

“However the medium term success of this policy relies heavily on the confidence of depositors that compensation commitments will be met in the eventuality of further lira volatility.”

Deutsche Bank economist Fatih Akcelik told Bloomberg: “We maintain our view that the markets will force the central bank to hike its policy rate at some point this year although recent communication has been against rate hikes.”

Outlook for Turkey remains increasingly uncertain with global ratings agency Fitch recently downgrading Turkey further below investment grade.

Concerns have also been raised over the impact of growing tensions between Turkey’s Black Sea neighbours Russia and Ukraine which could potentially disrupt trade and push up energy prices.

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In its update today Turkey’s Monetary Policy Committee said “increasing geopolitical risks” were increasing the uncertainty.

Mr Wood predicted that “with inflation running at such elevated levels, there are large question marks as to whether or not further depreciation can be prevented.”

If the Lira continues to fall he warned the deposit scheme could end up as another “layer of jeopardy” with investors becoming concerned about Turkey’s fiscal position.

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