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Turkey - Lira In Crisis: Extrapolating the Erdogan Endgame

The CBRT is faced with some difficult choices as lira depreciation in the face of ultra-loose monetary policy sparks concerns of a protracted currency crisis in Turkey.

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Executive Summary

  • The CBRT is facing an acute currency crisis with markets now anticipating emergency hikes or FX interventions & unconventional policy tools as the lira devalues at an accelerating clip on ultra-loose monetary policy settings.
  • De-anchored expectations, alongside increased dollarisation and weak monetary policy credibility, continue to provide snowballing risks to the inflation outlook and further TRY weakness in the absence of real policy rates.
  • With 2018 in mind, the establishment & maintenance of real policy rates provides a potential solution, but clashes with Erdogan's political ambitions ahead of 2023 elections - placing a theoretical cap on emergency hikes around +400-500bp
  • Turkey's policy difficulties are likely to continue as long as Erdogan remains in power with sole control over the leadership structures at the CBRT - keeping TRY assets in a self-fulfilling cycle of depreciation until a credible policy framework can be established.

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TRY Currency Crisis - 24.11.21.pdf

Turkey currently faces an inordinately difficult task of anchoring inflation expectations and re-establishing CBRT credibility in the face of broad, and accelerating currency weakness. This leaves the CBRT with a stark menu of policy options from which to choose to stem the risks to the real economy. Among the best options are delivering positive real rates through a series of large emergency rate hikes, but the bank could also resort to previously used non-standard policy tools to counter TRY weakness. These include rate corridors, tweaking reserve requirements at state banks, clamping down on currency speculation and the likely last resort: capital controls