What on earth is happening to the Turkish Lira?

Turkish money, 2008 (Turkish lira)The Turkish Central Bank rate cuts earlier in December and January are being seen “an attempt to create an unstable lira and deter the inflow of speculative capital,” said Professor Necip Çakır, chairman of the Economics Department at Bahçeşehir University. “The Central Bank is creating uncertainty about the lira, which will keep foreign capital inflows away and reduce ‘hot money’.”

“By lowering the exchange rate, inflation may be curbed, but more importantly you create uncertainty about the exchange rate and thereby discourage foreign speculative money overheating the Turkish economy,” he told the Hürriyet Daily News & Economic Review.

The last couple of months have seen an unprecedented reduction of the exchange rate in Turkey to 6.25% which has led to the Turkish Lira weakening and to record low inflation rates.

At the time of writing this article (22/2/2011) the Turkish Lira was approaching 2.60TL/£1 and at that point traditionally speculators would start buying TL in expectation that the currency would soon move towards 2.50TL/£1 when they would sell and make a quick profit. The Turkish Central Bank is trying to reduce the attractiveness of this speculation by bringing more uncertainty to the market. However, once it appears that the TL’s future is one of a weakening currency the expectation is that those with holdings of that currency will panic and to sell the lira, further weakening the currency. If this were the case then those in North Cyprus, for instance, who bought when the currency moved from 2.25 to 2.40 or even 2.50TL/£1 are going to have to sit on that money or take a loss. Back in the days when you received 18% pa or better for your money this was not a problem but with possible further Turkish Central Bank rate reductions low returns will further reduce the attractiveness of investing in the Turkish Lira.

Mind you, those with sterling only accounts must be wondering if 2.60TL/£1 is the time to take a gamble and transfer substantial amounts into Lira. So where is the Lira headed; 2.40 or 2.80TL/£1? Or will it just sit around the 2.55-2.60TL/£1 until summer tourists pour into Turkey to take advantage of the exchange rate and by buying Lira strengthen it again? Your guess is as good as mine.

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