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The Turkish lira has dropped to its lowest level since December as a result of Ukraine concerns.

by Seerat Fayaz   ·  March 10, 2022   ·  

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By 0844 GMT, the lira had fallen 1.3 percent to 14.6505 per dollar, its lowest level since Dec. 20, when the government announced a plan to protect lira deposits from currency depreciation. 

The Turkish lira fell for the seventh day in a row on Wednesday, bringing its losses to more than 5% since Russia launched its attack on Ukraine, raising Turkey’s inflation and current account risks. 

The lira is now down 10% since the end of 2021, a year in which it lost 44% of its value against the dollar. 

Through costly interventions in the foreign exchange market and the lira protection scheme, authorities were able to keep the lira in a narrow band in the first two months of the year.

When volatility returned in late February as tensions between Moscow and Kyiv rose, the currency blew through 14 against the dollar before rebounding. 

The currency crisis was precipitated by a central bank easing cycle in which the policy rate was reduced by 500 basis points to 14 percent since September. 

The Treasury compensates for the difference between the interest rate on lira deposits and the currency’s depreciation on the maturity date under the lira protection scheme.

The burden on public finances necessitates additional indirect taxes or monetary expansion, which could result in an inflationary spiral. According to Turkish economists, the lira’s depreciation is already putting strain on public finances because the currency’s depreciation is greater than periodic yields, and the lira deposit scheme is becoming less sustainable. 

The interest rate cuts are part of President Tayyip Erdogan’s new economic plan, which aims to turn Turkey’s chronic current account deficits into surpluses, boost growth, employment, and exports, and keep interest rates low. 

However, the rise in commodity prices from oil to wheat as a result of Russia’s invasion of Ukraine is likely to increase the deficit while also stoking inflation, which is already at 54%.

The interest rate cuts are part of President Tayyip Erdogan’s new economic plan, which aims to turn Turkey’s chronic current account deficits into surpluses, boost growth, employment, and exports, and keep interest rates low. 

However, the rise in commodity prices from oil to wheat as a result of Russia’s invasion of Ukraine is likely to increase the deficit while also stoking inflation, which is already at 54%. 

Given Erdogan’s aversion to high borrowing costs, economists believe a rate hike is unlikely. 

Given that keeping rates stable now means remaining behind the curve, there should be a change in (the central bank’s) strategy, but there has been no indication from authorities of a return to orthodox policies.

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