There’s been a rapid plunge seen in the Turkish Lira this morning as the beleaguered currency has crashed to new all-time lows. The Lira has been under heavy pressure this year and was already lower by more than 40%, but today’s move is the most dramatic seen thus far with declines at one point of more than 12%. The losses year-to-date, while large, have been fairly measured but today’s swift swoon shows that investors are getting increasingly concerned that a full blown currency crisis may be imminent.

The root cause for the weakness seen in the Lira has been Recep Erdogan’s unorthodox views on monetary policy, with the president ignoring the conventional wisdom that higher interest rates are needed to curb runaway inflation. There was signs of hope before his recent re-election when a 300 basis point hike raised the base rate up to 16.5% in May and the Lira immediately regained a footing. However, since his victory at the polls, which not only saw him retain his position but due to constitutional changes granted him even greater power, Erdogan seems to have fallen back into his old ways with the last central bank decision last month seeing rates kept on hold despite surging inflation.

Where we go from here remains highly uncertain, with recent diplomatic tensions with the US the catalyst for this latest drop.It seems highly unlikely that Erdogan will perform a dramatic U-turn on his monetary policy stance. The turmoil is starting to garner an even greater level of attention in financial markets and previous emerging market crises have had far ranging consequences. There is some hope that today’s plunge represents a final flush out for the currency, and the Lira has actually recovered a fair chunk of the losses, and now trades lower on the day by around 6% after earlier falling as much as 12%. Capital controls or IMF interventions are two possible outcomes which may come to the aid of the Lira, but Erdogan and his influence remains a highly unpredictable factor which could see things get a whole lot worse before they recover.

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