USD/TRY forecast: can the Turkish lira be saved?

The Turkish lira rose slightly this week after the shock municipal elections in Turkey. The USD/TRY exchange rate slipped to a low of 31.76 on Monday and then rebounded to 32.18 on Tuesday morning. It has surged by more than 70% from its lowest level in 2023.

The Turkish lira has been in a strong plunge for a long time as concerns about President Erdogan’s policies have continued. From the fiscal side, the government’s budget deficit has continued widening because of more spending and higher wages.

The Turkish government and the central bank have attempted to supercharge the lira but there are signs that these actions have backfired.

The central bank has embraced higher interest rates in a bid to encourage more Turkish to save their funds in the local currency. It has hiked rates from 8.5% in March to 50% today. This performance means that Turkey has some of the highest rates in the emerging markets.

However, there are signs that these rate hikes are not helping to lower the country’s inflation. The most recent report revealed that Turkey’s inflation jumped to 67% in February last year. Economists expect Wednesday’s report to reveal that the CPI soared to 69.10% in March.

In theory, high-interest rates should help lower Turkey’s inflation and boost the allure of the Turkish lira. A stronger lira can help to lower inflation since Turkey is a net importer of the most important things like crude oil and natural gas.

The main reason why the Turkish lira has not improved in this high-interest rate environment is that inflation remains high. As such, if you invested in Turkish government bonds, you will still generate negative returns since inflation is much higher. 

Turkey has also deployed other tools to save the local currency. For example, the central bank is making it harder for commercial banks to have deposits in hard currencies. It has also imposed measures to ensure to promote the lira. For example, it increased a ratio that ensures that banks maintain liras to 8%.

USD/TRY exchange rate

All these actions, together with the increasing Turkish exports and tourism have not helped to save the Turkish lira. The most recent data shows that Turkey’s exports jumped to over $20 billion in January, continuing a trend that started in 2023.

The currency has continued falling because most people and companies in the country have lost faith in it. For one, they are aware that the Turkish lira has been in a strong downward trend for decades. It was trading at 1.33 against the US dollar in 2008, meaning that it has shed over 2,670% in value.

I believe that two things will help to boost demand for the Turkish lira. First, interest rates need to move much higher than the country’s inflation. That is unlikely to happen since Erdogan hates high-interest rates.

Second, in the long term, the currency will likely gain when Erdogan’s term ends. This is evidenced by Monday’s performance of the lira after Sunday’s surprise election. Finally, the central bank should work to improve its foreign exchange position, which is deteriorating.