Goldman Sachs Expects Turkey to Allow Faster Lira Depreciation

Goldman Sachs analysts said they expect Turkish authorities to pivot their monetary strategy, allowing for a faster depreciation of the lira to stabilize the country's external balances rather than prioritizing the reduction of inflation.

A Shift in Economic Priority

In a report published Monday, economists Clemens Grafe and Basak Edizgil projected that Turkey will permit the lira to decline against the U.S. dollar at an annualized rate in the mid-20% range. This marks a significant change from the previous strategy, which involved letting the lira strengthen in real terms—depreciating slower than inflation—to help control soaring consumer prices.

The analysts argue the new focus on external accounts comes as Turkey faces increasing competitive pressure. The report notes that Turkey has been losing export market share in key sectors:

• Intermediate goods: losing ground to China.
• European consumer goods: ceding market share to Central and Eastern European exporters.

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According to Goldman Sachs, stronger exports in capital goods and defense have not been sufficient to offset these losses, prompting a potential policy adjustment to improve export competitiveness through a weaker currency.

Implications for Rates and Inflation

A faster pace of depreciation is expected to have significant consequences for Turkey's economy. The Goldman Sachs report warns this approach will likely slow the pace of disinflation. The lira has already fallen about 9% against the dollar this year, while consumer prices rose over 17% in the first six months, with annual inflation hitting 32.1% in June.

Furthermore, the economists stated that maintaining financial stability and current levels of de-dollarization would require interest rates to remain higher than what financial markets currently anticipate. This analysis comes as Turkey’s Monetary Policy Committee prepares to meet on Thursday, with the central bank's one-week repo rate currently at 37%.