Turkish lira to depreciate but no crisis expected, MUFG says

Turkey’s embattled lira is expected to continue depreciating but no repeat of a currency crisis in 2018 is expected, said analysts at MUFG Bank, Japan's largest lender.

The lira will weaken at least until the Turkish authorities establish credibility on stabilising inflation, the analysts said, currency news website FXStreet reported on Thursday.

“There are greater restrictions in place now on trading TRY and hence the scale of TRY turmoil witnessed in August 2018 is unlikely to be repeated,” they said. “But the direction of travel is clear and we maintain out view of continued gradual TRY depreciation going forward.”

The lira hit 7 per dollar on Thursday, its lowest level since early May, when it fell to an all-time low of 7.269 against the U.S. currency. Earlier this week, the central bank said the level of interest rates was sufficient to slow inflation to a target of 8.9 percent by the end of the year from 12.6 percent in June. The benchmark interest rate stands at 8.25 percent, meaning real rates are negative.

The MUFG analysts said a boom in lending, led by state-run banks, was driving lira weakness.

“With the aggressive push for credit into the real economy investors are also anticipating a deterioration in Turkey’s current account position,” they said. “Turkey’s current account position turning to deficit with one of the largest negative real yields is a recipe for currency depreciation.”