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Turkish Lira: What’s going on?


Recent pressure on the Lira has arisen from a number of factors. Including the unusual use of the Central Bank’s resources to cover the budget deficit. Exports must significantly increase if the Lira is to trend higher over the long term; it is insufficient for imports to decline relatively in order to correct current account imbalances because imports are heavily biased toward capital goods required by the Turkish economy’s “assembly businesses,” which include automakers and auto parts manufacturers like Otosan, Turkey’s largest exporter. Restructuring problematic debts inside the banking system, many of which are related to the housing and construction sector is another part of easing foreign exchange concerns.

There is no free lunch when it comes to a currency’s worth and stability. The rules of supply and demand still apply to a country’s currency, thus the more of it that is created, the less value it has. In times of crisis, increasing the money supply may be necessary, but once the crisis has passed, it is very difficult to change this course. History demonstrates that before difficult efforts are done to stabilize the currency and undo the economic harm, a crisis and unchecked inflation are typically required.

Turkey already reduced its money supply by increasing interest rates. As a result, it appears to me that they have already begun to fix the issue. The fact that things appear to be going well with Washington is another key step. Ankara might be caving in a little bit. We do think that the Lira will eventually drift lower. This is because given the problems in the banking sector and the Fed’s ongoing rate hikes.

Following yet another unexpected interest rate drop by the central bank on Thursday—this time by 100 basis points—the Turkish lira plunged to a new record low. Despite inflation exceeding 80% year-over-year and while other officials across the world hurry to raise interest rates to combat persistent inflationary pressures, the CBRT dropped its benchmark rate to 12%. Here is how analysts feel about the most recent choice: SEB, PER HAMMARLUND, Chief Executive Strategist The primary message from this was that they are currently more concerned about growth than inflation. “They reduced to sustain the economic outlook,” The lira will experience increasing selling pressure in the future.

They will need to devise a plan of action to try to sustain the lira without depleting reserves. Therefore, I would anticipate a declaration or intervention of some kind within the next few months, at the very least. Naturally, there has been a decrease in risk appetite since September. However if energy prices start to rise again—which is possible given the deteriorating state of relations with Russia. It would put downward pressure on the lira. Head of total emerging markets at Allspring Global Investment implied that It is challenging to pursue a market like that. Where the economic policy is illogical. However once a good government  is in place. We have previously seen markets perform quite well in nations like India and Indonesia.

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