Emerging Europe: Turkey currency crisis

Currency crisis

Turkey: Sharp slide of the lira in May darkens economic prospects

On the brink of collapse

The Turkish lira (TRY) experienced a sharp and accelerating sell-off in May, triggered by a range of weak data and bad news. A drop in the Manufacturing PMI, rising inflation, large portfolio investment outflows, a downgrade by S&P, and especially a remark by President Erdogan that he would take greater influence on monetary policy if he wins the presidential election this month shook investor confidence substantially. Belatedly, after the TRY had fallen -20% in the month, the Central Bank of Turkey took some decisive measures in the last week of May. It hiked the key policy interest rate by 300bp to 16.5% in an emergency meeting; and it simplified the operational framework of monetary policy. For now, these measures have helped the TRY recover some lost ground, although it has remained volatile and well below April’s levels.