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Why the Turkish Lira Just Keeps on Falling

October 23, 2020 By Young Research

By Ellischlee @ Shutterstock.com

The Turkish lira hit a new record low against the dollar this week as the country’s central bank held rates steady. The Wall Street Journal’s Caitlin Ostroff and David Gauthier-Villars report:

The lira fell 2.1% on Thursday, with $1 buying 7.9792 lira, after the central bank left its key, one-week repo rate at 10.25%, surprising the majority of investors and analysts who anticipated an increase.

For several months, the central bank’s main policy rate has been negative when adjusted for inflation, making holding the Turkish lira an unattractive proposition for foreign investors and residents alike. Inflation in Turkey was at 11.75% in September, according to the central bank.

The lira is one of the worst-performing currencies this year and has lost a quarter of its value against the U.S. dollar.

Economists have repeatedly called for Turkey to raise interest rates to compensate for inflation that erodes profits from holding Turkish bonds and stocks and to keep the currency from depreciating further. Instead, Turkey slashed interest rates for much of the year and increased credit to households and businesses. This increased imports at the same time the coronavirus pandemic has hit exports.

Last month, Turkey surprised investors by lifting its key rate to 10.25% from 8.25%. Investors hoped that the central bank would continue along that path following its September meeting, which could inspire confidence for foreign investors to return to the market, said Emre Akcakmak, a portfolio manager at asset manager East Capital.

Read more here.

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