On Monday, the Turkish Lira slipped once more, as it continued its slide towards 18 against the US dollar. This was because of mounting concerns about the foreign exchange policy of the government with inflation soaring combined with worries of a global economic recession.
Lira’s decline
According to analysts, unless authorities are able to discover a new source of getting foreign funds for buffering the country’s depleted reserves, it is likely that the Lira would continue depreciating slowly. In the next few weeks, there will be even more uncertainty, as a decision would be made by corporate depositors about whether they should continue with the special lira-protected state-backed accounts.
There was a 0.4% drop in the Turkish Lira against the US dollar, which brought it to a value of 17.8335. This is the weakest level the currency has been since December when there had been a full-blown crisis that brought it down to a low of 18.4. Analysts said that due to the current policy, the Lira was losing a little value every day. They said that forex can only be balanced if the currency continues to lose a limited value.
This month alone has seen the Turkish currency fall by 6.3%.
Inflation in the country
This week, the key focus of attention is the expected increase of 75 basis points in the interest rate by the US Federal Reserve on Wednesday and the quarterly inflation report from the Turkish Central Bank on Thursday.
It is expected that the Turkish central bank will once more raise its inflation forecast for the end-year, which had previously been 42.8%. According to predictions, annual inflation by the end of the year will reach 70%. It had touched 80% in the previous month, which had been a high of 24 years.
There had been a number of unorthodox cuts in the interest rate that triggered the rampant inflation in Turkey. This resulted in Lira shedding 44% of its value in the previous year. This year has seen the currency shed yet another 26%.
Central bank’s decisions
Even though depreciation seems to be unrelenting, it is expected that the Turkish central bank will continue to keep its rate unchanged at 14% for one more year at least. It is expected to focus more on macro-prudential measures on liquidity and loans.
The net forex reserves of the central bank have declined to almost $6 billion this month, which is the lowest since 2002. According to bankers, the forex reserves are negative $55 million, excluding swaps. The need for fresh foreign resources has climbed to an unprecedented level, but whether it will happen or not remains to be seen.
Authorities had introduced special accounts at the end of 2021 called KKM that was aimed at stemming the fall in the Lira. Their goal was to protect corporates and savers from large declines in Lira’s value by discouraging people from hoarding gold, euros and US dollars. Thanks to these accounts, there has not been a lot of forex demand.
