27.11.2023 – Something astonishing is happening with the Turkish lira: namely nothing. Although the Turkish central bank has now drastically increased interest rates, the currency continues to lose value unabated. An alarming indication of the total loss of confidence.
You rarely see that: No reaction to a rate hike, zero, nothing. Here is the daily chart of USDTRY. The distinctive central bank governor Hafize Gaye Erkan, who has been in office for six months, has shown backbone and economic expertise – after all, she is a trained banker with the addresses of First Republic Bank, which was taken over by JPMorgan, and Goldman Sachs on her CV. Last week, the governor pushed through an interest rate hike of a whopping 5 percentage points to 40 percent. This was the sixth rate hike in a row; when she took office, the interest rate was at 8.5 percent.
However, the new female wonder weapon has evidently already worn off: As recently as August, the currency market had reacted strongly when Erkan raised the interest rate far more than expected from 17.5 percent to 25 percent – forecasts had been for 20 percent. We are therefore curious to see how long it will last, because good is sometimes not good enough.
Inflation rate at 61 percent
The reason why the lira continues to plummet is the fact that inflation is still a good deal higher than the massive interest rate: Last month, inflation was a staggering 61.36 percent. Another problem is the central bank’s announcement that there will probably be no more interest rate hikes soon – the current level is close enough to that which is suitable to initiate a disinflationary course. Hmm…
Investors obviously see things differently: “Save yourself who can” is the motto of all those who still hold lira. Accordingly, play money is being exchanged for gold, dollars or euros. In addition to the loss of confidence in the retail market, we are seeing above all a massive flight of capital by investors.
Chauvinism on the Bosporus
The reasons are simple: President Recep Tayyip Erdoğan is pursuing a course that combines ultra-nationalism with Islamic fascism, which may please poorly integrated Turks in Neukölln or elsewhere in the European Union, but does not increase their chances of joining the EU. Turkey is de facto better suited to the Arab League, where the agitation against Israel is readily heard. Ditto in Iran or in China, which as always opportunistically sides with the over one billion Muslims in the Gaza war, but in the meantime continues to blithely eradicate the culture of the Uyghurs and tear down mosques. To which Ankara remains silent, just like the rest of the oh-so-moral Islamic world.
The important link to the European economic area is therefore missing. As a war profiteer, Turkey earns twice over because it supplies both Russia and Ukraine with weapons. However, the war in Syria and the civil war against the Kurds in its own country are costing a lot of money, which is why the central bank is busy printing digital money. The upshot of all this is that it doesn’t look like Turkey will become part of the Western world any time soon – on the contrary. We wonder when Turkey will be thrown out of NATO.
The price target for the lira therefore remains: zero. In other words: currency reform. Of course, only if the current policy continues. Always keep an eye on the real-time news: An interest rate shock with an unexpected increase of 20 percent between the regular meetings or a multiplication of the interest rate for overnight lending can lead to harsh swings as in August. Bernstein Bank wishes you successful trades and investments!
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