As the lira slides, what will Turkey’s central bank do?

THERE SEEMED to be no end to the unusual measures Turkey would take to shore up the lira. The government had made it prohibitively hard for foreigners to bet against the battered currency. By the end of June the central bank had burned through $65bn in foreign reserves to protect it, in effect pegging it to the dollar for the past couple of months. On August 6th, however, the bank gave up and allowed the lira to float. It promptly sank (see chart 1). The currency fell by more than 3% during the day, reaching a record low.

Turkey may now be facing a repeat of the crisis of 2018, when a standoff with America, a credit boom and a bulging current-account deficit forced the central bank to impose towering interest rates in order to prevent a currency meltdown. Its monetary-policy board meets on August 20th. But the bank is even less independent than it was in 2018. Turkey’s president, Recep Tayyip Erdogan, sacked its previous governor for refusing to slash rates. His successor is highly unlikely to raise them without Mr Erdogan’s permission.

Another complication is that the bank’s foreign-currency assets are depleted. Gross assets dipped to $90bn in July (see chart 2). Net assets, which deduct foreign liabilities and borrowing through currency swaps with local banks, stand at -$41bn. “They have run out of ammunition,” says...