Erdogan’s Monetary Policy Pushes Lira to Record Lows

Turkey's lira has hit record lows for the past week, thanks to what analysts say is the Turkish government's unwillingness to balance monetary policy to counter double-digit inflation.

And the fall has been accelerated by geopolitical uncertainty over US and Russian military actions in neighboring Syria, CNBC reported.

The currency made a sharp rebound on Friday, however, as top Turkish officials hinted at possible government action with regard to the exchange rate, although without offering specifics. The key question now is how effective those actions will be.

A policy of prioritizing growth over inflation control, led by the powerful President Recep Tayyip Erdogan, has unnerved emerging market investors for some time now. The president, who has called himself an "enemy of interest rates", has effectively prevented any recent central bank tightening, despite inflation sitting at a lofty 10.23%.

Erdogan has called the recent currency sell-off an economic attack by Turkey's enemies, describing it as "games being played on our economy". But investors say that markets have been desperate to see interest rate hikes by the central bank; its last two sessions saw no change in policy, following Erdogan's calls to keep rates low in order to boost growth numbers.

The lira, which had depreciated 13.9% since August to reach an all-time low last week of 4.194 against the dollar, currently ranks as one of the worst-performing emerging market currencies this year. On Friday, it climbed back 0.74%, reaching 4.08 lira to the dollar.

Turkey's treasury bond yields, meanwhile, have hit multi-month highs and its February current account deficit increased by more than 60% on the same period in 2017 to $4.152 billion.

Growth in the country of 80 million has been impressive; real GDP growth in Turkey reached 7.4% for 2017, more than twice the previous year's growth rate and the highest in the G20.

But this rate of growth doesn't come without risks, said Adrien Pichoud, portfolio manager and chief economist at SYZ Asset Management. "The economy is overheating and has some large imbalances: double-digit inflation and a ballooning current account deficit, both of which are reflected in a weak currency." It was this environment, Pichoud noted, that led Moody's to downgrade Turkey's credit rating to junk status in March.