WASHINGTON: Turkey’s central bank is likely to be forced to draw further on its foreign-exchange reserves to defend the lira as portfolio outflows continue apace, according to IHS Markit.
While the country’s current-account deficit narrowed in April, by $4.5 billion year on year to $9.58 billion, it will probably widen again as expansionary economic policy boosts demand for imports, Washington-based associate director at IHS, Andrew Birch, wrote in a report.
Portfolio outflows slowed from March’s record of more than $5 billion to a still significant $1.53 billion in April, helping the lira weaken 2.4 percent after a briefly rally on the first of the month.
“Continued capital losses will further exert downward pressure on the lira,” said Birch. “If political influence forces the central bank to cut interest rates prior to August or September, capital outflows would accelerate greatly, severely undermining lira stability. Another run on the lira would jeopardize Turkey’s already tenuous ability to meet short-term external obligations.”
In March, Sahap Kavcioglu, a former banker and parliamentarian from the ruling Justice and Development Party, who is known for his staunch opposition to high interest rates, became the fourth Turkish central bank governor appointed since July 2019.
His predecessor Naci Agbal's attempts to restore monetary discipline in the country were praised by international investors. However, he was fired after less than five months, a day after he imposed a much-needed but bigger-than-expected interest rate hike — by 200 basis points to 19 percent — to bolster the lira.