On Tuesday, Turkey’s lira plummeted to a historic low of 13.44 to the dollar, a level previously unthinkable and far beyond what was termed the “psychological” barrier of 11 to the dollar only a week ago. In a note in response to the news, Tim Ash, senior emerging markets analyst at Bluebay Asset Management, stated, “The lira is absurd where it is, but it’s a reflection of the bizarre monetary policy settings Turkey is presently working under.”. At 4 p.m. local time on Tuesday, the lira was trading at 12.7272 to the greenback. It went down almost 15% on the day at one point.
The sell-off came after Turkish President Recep Tayyip Erdogan defended his central bank’s controversial interest rate cuts, ongoing despite growing double-digit inflation. He described the action as part of an “economic battle of independence,” dismissing investor and expert pleas for a reversal of direction.
Turkey’s inflation rate is currently around 20%. This means that basic products have skyrocketed in price. Local currency incomes have been drastically depreciated for the country’s 85 million people. The lira was trading at around 5.6 to the dollar at this time last year. And that was already making headlines, as the currency had plummeted from a high of 3.5 to the dollar in mid-2017.
Outlook on Turkish Economy and Lira
Turkey’s currency has been falling since early 2018. This resulted from a mix of geopolitical concerns with the West, current account deficits, diminishing currency reserves, and increasing debt. However, most critically it was an unwillingness to boost interest rates to reduce inflation.
Erdogan has often referred to interest rates as “the enemy.”. He contradicts economic orthodoxy by claiming that rising rates increase inflation rather than improve it.
Investors are concerned about Turkey’s central bank’s lack of independence since Erdogan controls its monetary policies mostly. In the last two years, he has sacked three central bank presidents due to policy disputes.
Semih Tumen, a former deputy governor of the central bank whom Erdogan fired in October, slammed the president’s actions.
Last Thursday, the central bank reduced rates by 100 basis points to 15%, kicking off the current steep fall. Since September, it has lowered rates by 400 basis points. According to Fitch Ratings, 57 percent of Turkey’s central government debt was tied or denominated in foreign currency in August. This made repayment more difficult as the lira continues to depreciate.