Additional monetary tightening by the Turkish central bank has been required to slow the decline in the lira. In early June, policy makers confirmed their intention to take action in the form of foreign exchange sales, and recent reports suggest that record amounts have been sold. A volatile currency has exacerbated financial instability, raising concerns about capital flows and the ability of the country to fund its external liabilities. In a recent press announcement, the central bank noted that the response to the crisis in confidence would be “strong, effective and temporary”, with moves to shift liquidity gradually from net foreign assets to net domestic assets. Weakness in the lira may continue as fundamentals remain fragile and inflation surged to a nine-month high of 8.3% (y-o-y) in June. In addition, a wind-down in quantitative easing by the US Federal Reserve and fierce anti-government demonstrations have added to economic uncertainty. EU accession talks for Turkey, which were due to start in June, have been delayed due to the concerns from some member states about the response of the government to the street protests. However, an agreement has been reached for discussions to resume in October. Monetary tightening may stabilise the currency in the short-term, although higher rates do not bode well for the recovery in the economy, which expanded 3.0% (y-o-y) in Q1. On balance, the consensus is predicting that the lira will advance a little over the next twelve months, having lost 8.5% of its value in the year to date.
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