Turkish lira may drop to 8.5 per dollar as investors ‘see through’ rate hikes

Turkey’s lira may slide to as low as 8.5 per dollar because investors are “seeing through” rate hikes by the central bank, according to Tatha Ghose, senior emerging markets economist at Germany’s Commerzbank.

The Turkish central bank raised its benchmark interest rate to 10.25 percent from 8.25 percent last month to help stem the lira’s decline to record lows and rein in inflation of 11.8 percent. But the bank’s monetary policy lacks credibility due to political interference, Ghose said, currency news website PoundSterling Live reported.

“Rate hikes would have worked if they had been a credible part of a long-term traditional monetary policy to bring back inflation to the 5 percent target. But, they are not – President Recep Tayyip Erdoğan insists on unconventional monetary policy and still calls for low interest rates,” Ghose said.

“The market views rate hikes as a temporary stop-gap which will be reversed as soon as the lira has stabilised for any length of time – and if the market sees through a rate hike, then it does not work. This is what we are observing in latest lira movements.”

The Turkish lira hit a new all-time low of 7.9591 last Friday and traded down 0.4 percent at 7.9455 per dollar on Wednesday.

Ghose said the lira will decline to 8.2 per dollar by the end of the year but could slide to 8.5 before the government and monetary authorities change course. The exchange rate is likely to target 8.1 per dollar initially, according to Commerzbank’s technical analysis.

An orderly outcome for Turkey’s economy and the lira would most likely involve financial support from the International Monetary Fund, Ghose said.

“It is difficult to envisage orderly outcomes which do not involve the IMF,” he said. “Policymakers could always promise their electorate to repay institutional loans early and re-establish control. Still, the problem is that we are unlikely to get from here to there without some more damage to the exchange rate. This is why USD-TRY is likely to overshoot in coming months.”

An orderly outcome, involving some restoration of the central bank’s independence as part of economic reforms, would probably mean the lira gradually stabilises at around 8 per dollar over the coming year, Ghose said.