Turkey's Financial Turmoil Deepens... Surpassing 8 Lira is Feasible

NH Investment & Securities Report
"Concerns Over Foreign Currency Depletion Amplified by Excessive Liquidity Supply"

[Asia Economy Reporter Minji Lee] As the Central Bank of Turkey kept the benchmark interest rate unchanged, there are forecasts that financial market instability could worsen. On the 23rd, NH Investment & Securities predicted that due to the deteriorating investment environment and the government's anti-market policy stance, the Turkish lira could break through 8 against the dollar.

[Image source=Yonhap News]

Despite the recent sharp depreciation of the exchange rate, the Central Bank of Turkey (TCMB) recently held the benchmark interest rate at 8.25%. The decision was explained by the bank as aimed at normalizing commercial loans, easing household financial burdens through increased private lending, and curbing the widening inflation caused by the weak exchange rate. Accordingly, the lira fell to 7.26 against the dollar just before the meeting announcement but rose to 7.35 afterward. The yield on 2-year Turkish bonds also fell to 12.88% but then rose to 13.38%.

This is analyzed as a result of the monetary policy meeting falling short of market expectations. Previously, the market expected corresponding measures such as an interest rate hike amid worsening financial instability due to the sharp depreciation of the exchange rate, but the actual outcome did not meet these expectations.

Seongsu Kim, a researcher at NH Investment & Securities, said, “This freeze decision was a ‘turning a blind eye’ response to the worsening financial market,” adding, “Although an interest rate hike would have been an appropriate decision, there was not even a phrase related to measures addressing the market situation.”

TCMB plans to lower the foreign currency reserve requirement ratio for banks in response to the weak exchange rate. Foreign currency liquidity of $13.4 billion (a total of $17.7 billion since March) is scheduled to be supplied, but considering Turkey’s foreign exchange reserves ($50.9 billion since July), this measure is judged to be excessively large. Researcher Kim said, “Excessive liquidity supply is another bad move that will ultimately amplify concerns about foreign currency depletion domestically, leading to intensified financial instability.”

As the central bank missed the appropriate timing for response, Turkey’s deteriorating investment environment is expected to continue. Just as the breakthrough of 7 lira against the dollar became a reality, the possibility of breaking through 8 lira is also expected to gradually increase.

Researcher Kim said, “Financial stability is an urgent task, but President Erdogan continuously insists on strong monetary policy easing,” adding, “Due to Turkey’s external diplomatic and political frictions, the Turkish financial market is entering an unknown territory rather than a realm of forecast.”

This content was produced with the assistance of AI translation services.