Turkey: Lira hits new low in September on geopolitical tensions and high inflation
On 4 September, the Turkish lira traded at TRY 7.44 per USD, a new all-time low. This marked a 7.2% month-on-month depreciation, while the currency was down a staggering 23.8% compared to the same day a year prior. Moreover, the lira depreciated 20.0% in year-to-date terms.
The steep depreciation came on the back of renewed geopolitical tensions with Greece, and elevated inflation amid questions over the Central Bank’s actions. Turkey has been embroiled in a row with Greece over natural gas exploration in disputed waters in the Mediterranean Sea, accompanied by increasing militaristic rhetoric. However, according to NATO officials, both countries have recently tried to resolve the matter diplomatically, with the respective governments entering technical discussions in early September. In addition, inflationary pressures remained persistently high through August and investors are skeptical about the Central Bank’s commitment to its price-stability mandate in the current climate, with the authorities using cheap credit to fuel an economic recovery.
Going forward, the Turkish lira is expected to remain depressed against the greenback this year and beyond due to lingering global uncertainty over the economic recovery from Covid-19 and persistent capital outflows amid a stubborn twin deficit. Sizable foreign-currency denominated external debt repayments in the private sector will also weigh on the currency.