Turkey: threat of currency crisis continues to grow

The Turkish lira has remained under significant pressure at the start of this week and there is a growing risk that the central bank’s continued obedience to pressure from President Erdogan for interest rate cuts results in sharp and disorderly falls in the currency over the coming days and weeks. That would cause inflation to rise even further and broader financial conditions to tighten. Strains would also build in the banking sector and, while it would require a prolonged bout of market stress before a wave of bank defaults became a serious threat, a credit crunch would almost certainly ensue.