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Turkish lira falls back to record lows

Following the announcement of a further interest rate cut by President Erdoğan, the Turkish currency has lost nearly 4.5% of its value against the euro, breaking depreciation records
Banco Central de Turquía

AP/EMRAH GUREL  -   Currency exchange office at an open market in Istanbul on Monday, 22 March 2021

Just hours after the Turkish president declared on Wednesday his intention to go ahead with interest rate cuts, the value of the Ottoman currency plummeted to an all-time low. The Turkish lira, devalued for the eighth consecutive year, according to the official website of the European Central Bank, reached its lowest value against the euro yesterday, at 12.3 lira per unit.  

This came just a day before Recep Tayyip Erdoğan was due to meet the Turkish Central Bank (TCMB) committee, where the monetary authorities were expected to agree on a further interest rate cut.  

"We will take this interest calamity off people's shoulders. We will not let them be crushed by interest rates. There is no other way out," the president declared in a speech in front of Justice and Development Party (AKP) affiliates. 

Erdogan
Presidencia turca vía AP  -   The President of Turkey, Recep Tayyip Erdogan

Thus, the Turkish central bank today announced a further rate cut of another 100 basis points, bringing interest rates down to 15% below year-on-year inflation. Erdoğan is sticking to his guns; "interest rates are the cause, and inflation is the result", the president has maintained. However, this strategy is the complete opposite of that adopted by the world's major economies, which have advocated an upward rate cycle.  

Moreover, many economists and financial sector experts, both Turkish and international, maintain that if the currency weakens, this will tend to worsen inflation - already running at 20 per cent in the country - as the prices of imported goods will only increase. "Surely the [central bank] can't cut rates today, not even a maintenance would be enough, they have to raise them, and aggressively," Tim Ash, market strategist at BlueBay Asset Management, told the Financial Times. 

So, in the face of runaway inflation and the looming threat of a currency crisis, the Turkish lira continues to remain the worst performing emerging market currency. Its value has fallen by 25% since the beginning of the year, and over the last four years, it has depreciated by more than 65% against the dollar. 

Kavcioglu
Banco Central de Turquía vía REUTERS  -  The Governor of the Central Bank of Turkey, Sahap Kavcioglu

This economic situation has been described by many as the result, among other things, of the Turkish president's repeated interference in the financial and monetary sectors. Since 2020, the Turkish Central Bank has seen four different governors pass through its presidential office as a result of pressure from the president. His role in the dismissal of Naci Ağbal, a supporter of higher interest rates to curb inflation, was harshly criticised by his opponents and detractors.  

Now, with Sahap Kavcioglu as governor of the TCMB since last March, Erdoğan is pressing ahead with the monetary strategy that he claims will be the basis for economic growth, ahead of the 2023 elections. However, as long as the Turkish administration does not implement structural reforms to its economy, it will remain defenceless in the face of macroeconomic imbalances linked to inflation, the low savings rate and the external deficit.