Turkish lira hits fresh record low following US sanctions
Peter Kinsella who acts as the director of rates and FX strategy at the Commonwealth Bank of Australia said Thursday that the lira has been under pressure for several years due to rising inflation.
Kinsella told CNBC by phone that Turkey’s real interest rates, which are adjusted for inflation, now sit at just 1 percent and that isn’t high enough to stabilize a depreciating lira. He said supporting the currency would need a sustained period where rates, when including for inflation, offered a greater return.
“The central bank needs to give a credible commitment to maintaining a very large positive real interest rate spread for at least 18 months to 2 years,” said Kinsella.
The analyst said, however, that this was historically not a typical course of action for a central bank that tended to cut rates as soon as there was any evidence of price stability.
Kinsella added that few investors believe Erdogan will grant the central bank sufficient autonomy to raise rates, but he predicts that some foreign capital will stay invested in underlying Turkish assets as long as they are deemed cheap and rewarding.