The Central Bank of Turkey is employing a risky strategy.
Last week, the bank governor, Erdem Basci said that the bank does not intend to use interest rates to defend the lira. Instead he says that foreign exchange reserves of US$ 40 billion will be used to shore up the lira.
Markets have looked at this statement and basically ignored it. US40 billion is a very small number in global terms. US$ 8 billion has already been used up with no noticeable effect.
As the Turkish lira weakens, so its inflation rises. This is because it has to pay so much more for its imports including oil. Inflation is currently running at 9%, well above the central bank’s objective of 6% by the year end.
Petrol prices in Turkey were raised again last week; that is twice within a month. This is before demand surges for the winter months. Turkey is now the most expensive place in the world to buy petrol. Oil price increases push up the costs of energy, plastics, foodstuffs and manufacturing. They are all interrelated.
Gunay Cerkez, head of the TRNC Chamber of Commerce has said that the cost of living will inevitably rise. He pointed out that we are an island that needs to import oil and other products using a weakening Turkish lira. In fact the weaker lira will affect the TRNC far more than Turkey. That is because Turkish exporters can, at least, take advantage of a weaker currency to grow sales. However the TRNC has few significant exports.
Mr Cerkez also highlighted the plight of many borrowers in the North who have loans in foreign currency. They now face serious financial problems.