Turkish lira plummets to all-time low on Erdogan’s monetary feud and tense U.S.-Turkey relations

The currency also suffered from a diplomatic spat between the U.S. and Turkey. Building on already tense relations following the suspension of visa services between the two countries in early September, the lira tumbled on accusations made in late November by Turkish authorities regarding a court case on the U.S., which Turkish officials claimed was part of a conspiracy aimed at hurting the domestic economy.

The twofold problem quickly soured appetite for lira-denominated assets, causing the currency to weaken substantially and long-term bond yields to shoot up. Renewed political pressure on the CBRT also helped undermine the institution’s credibility and led analysts to question its freedom from political interference, a view substantiated by the Bank’s apparent unwillingness to increase interest rates and instead only tweak at the edges.

Among the series of unusual measures implemented throughout November—including the lowering of the upper limit for the FX maintenance facility within the reserve options mechanism and selling short-term forwards to local banks to limit speculative behavior in the FX market—the one that resonated the most was the Bank’s decision to cut banks’ borrowing limits on 21 November, a move that amounted to a 25 basis-point increase to the effective funding rate. Market participants, however, deemed this first tightening of monetary conditions in six months as insufficient. They viewed it as an attempt to buy time ahead of the Bank’s scheduled monetary policy meeting on 14 December.

All told, currency-related distress is likely to aggravate existing structural weaknesses in the Turkish economy. The current account deficit reached a two-year high in September, largely due to terms-of-trade losses caused by the rise in oil prices but also to robust domestic demand and a chronic savings gap. The significant deficit has become increasingly difficult to finance given Turkey’s dependency on highly volatile foreign portfolios and declining capital inflows, which has resulted in a steady decrease in FX reserves since the outset of 2017.

Value of Lira to drop further in 2018 and 2019

Looking ahead, worsening external metrics, deteriorating Turkey-U.S. relations and Erdogan’s unorthodox stance on monetary policy are likely to keep dragging on the lira’s performance. This will negatively feed into inflation expectations as well as make Turkey’s vulnerability to shifts in market sentiment more acute, particularly amid tightening global liquidity. Our panel expects the TRY to end 2018 at 3.91 per USD, and it projects the lira to depreciate further to 3.98 per USD by the end of 2019.

2018-2019 Economic Outlook

The government’s attempt to limit policy stimulus next year ahead of the 2019 election cycle and an unfavorable base effect will lead GDP growth to moderate in 2018. The FocusEconomics panel expects growth to come in at 3.5%, which is unchanged from last month’s estimate. The risk of a sustained depreciation of the lira and unanchored inflation expectations are, however, weighing heavily on the outlook. Our panel expects growth of 3.7% in 2019.

Photo by Blaque X on Unsplash

Sample Report

5-year economic forecasts on 30+ economic indicators for 127 countries & 33 commodities.


Free sample report

Access essential information in the shortest time possible. FocusEconomics provide hundreds of consensus forecast reports from the most reputable economic research authorities in the world.

Close Left Media Arrows Left Media Circles Right Media Arrows Right Media Circles Arrow Quote Wave Address Email Telephone Man in front of screen with line chart Document with bar chart and magnifying glass Application window with bar chart Target with arrow Line Chart Stopwatch Globe with arrows Document with bar chart in front of screen Bar chart with magnifying glass and dollar sign Lightbulb Document with bookmark Laptop with download icon Calendar Icon Nav Menu Arrow Arrow Right Long Icon Arrow Right Icon Chevron Right Icon Chevron Left Icon Briefcase Icon Linkedin In Icon Full Linkedin Icon Filter Facebook Linkedin Twitter Pinterest