Turkey Gets Stuffed (Again)

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What's going on?

The Turkish lira fell to yet another all-time low versus the dollar on Wednesday, underscoring the almost-constant slide of Turkey’s currency in recent years and concerns that a crisis could be brewing in emerging market economies.

What does this mean?

Following a report from an investment agency – which spelled out risks linked to the Turkish president’s unorthodox beliefs in lowering interest rates in Turkey, even while inflation’s running wild (more on that below) – the lira sunk by more than 5% on Tuesday and Wednesday.

Things calmed down after Turkey’s central bank raised interest rates in an emergency meeting on Wednesday to stem the flow. Raising interest rates generally encourages investors to buy up the currency associated with the central bank that’s raising the rates – and in this case, it stabilized the lira (although it’s still down 20% versus the dollar this year).

Why should I care?

The bigger picture: Paying interest sucks, but…

Nobody loves paying interest on debt, but increasing interest rates is a vital tool when managing an economy. For one, it clamps down on runaway inflation, which erodes money’s value and discourages people from putting aside their wages (and saving money for longer-term investment). Higher interest rates generally help cool inflation by reducing total borrowing (since people have to pay more interest to borrow) and encouraging people to save rather than spend (prices won’t jump as quickly if more money stays in bank accounts).

For markets: Emerging market currencies are falling across the board.

The return on US government bonds  – considered the world’s safest investment – has been growing this year. This means investors are increasingly keen to access that rising return and sell their investments in emerging markets, pushing down the value of the associated currencies as they do so. That’s bad news for companies operating there, however, since they often have debts in foreign currencies and run the risk of not being able to pay them (they are now more expensive in their home currency).

Originally posted as part of the Finimize daily email.

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