Keep your eyes open when it comes to the Turkish Lira! For a good two weeks now, the exchange rate between the US Dollar and the Lira has been stuck at the 6.85 mark, almost as if pinned down. But now something could happen. Before we come to topicality, here is a very brief review. It was only on May 21 that the Turkish central bank last lowered its interest rates. On and on, on and on it goes down with the interest rates in Turkey. This is currently to stimulate the economy after the Corona crisis. But the problem is that inflation is now rising for the second month in a row. The following chart of the Turkish statistical office, which shows the development of the last two years, shows it quite well.
Inflation and interest rates
After the high of inflation in autumn 2018 at over 25 percent, the inflation rate was able to ease to a low of 8.55 percent in October 2019. But since then the underlying trend has been upwards again. And where consumer prices in Europe, for example, had fallen significantly thanks to the corona crisis and above all because of the oil price crash, the trend in Turkey is not down but up. From 10.94 percent in April to 11.39 percent in May, inflation rose to 12.62 percent in June, according to today’s statisticians (expectations were around 12 percent).
This could weaken the Turkish Lira. Continually falling interest rates and rising inflation at the same time, that is not good for a currency. The difference is getting bigger and bigger. The key interest rate is currently 8.25 percent and the inflation rate 12.62 percent. A more than clear difference, which does not encourage foreign investors to invest money in Turkey. In the following chart, which goes back five years, we have put the two together. The interest rate (blue line) has recently fallen below the inflation rate. This is not good.
Turkish Lira still calm
The Turkish Lira has not yet moved since the release of June inflation data at 9am. Is it still to come? The arguments for the gamblers would be there. Or are Turkish banks, for example, which are close to the state, intervening to counteract this, as they have done in recent months? The exchange rate of the US Dollar vs. the Lira is still at 6.85. In the chart we see the course of the last six months.