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Here’s why Erdogan’s inflation and interest rate contempt pummeled Turkey’s currency

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The Turkish lira collapsed to an all-time high on Tuesday after President Recep Tayyip Erdogan doubled down on his unorthodox plan to tackle rising prices with lower interest rates, fueling concerns that the apparent contempt of the government for runaway inflation could intensify Turkey’s monetary problems for years.

Highlights

The pound fell 9% on Tuesday to fall to $ 0.08, or 13.45 per US dollar, bringing losses to over 19% over the past week and 23% over the past month.

Erdogan triggered the historic one-day plunge on Tuesday after a speech in which he defended recent cuts in Turkish central bank interest rates and vowed to win an “economic war of independence”.

In a recent note, analysts at JPMorgan blamed the pound’s exponential decline on three straight cuts in Turkish central bank interest rates, which Erdogan hailed in an attempt to boost exports, investment and employment, much like the reasoning behind the policy of the US Federal Reserve which kept interest rates at close to zero levels during the pandemic and most of the past decade.

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However, Turkey’s aggressive strategy clashed with traditional monetary policy using higher interest rates to curb rising prices: the country’s inflation rate. flew to nearly 20% in October, three times the decades-high inflation that has sparked widespread economic concerns in the United States

Although higher rates are used to curb inflation, Erdogan has long expressed his contempt for interest rates, which fell from 20% to 15% after recent rate cuts, and even called them the “mother and father of all evils” because they prevent economic growth.

In a statement Thursday morning, the Central Bank of the Republic of Turkey noted he had no commitment on exchange rates and criticized the fall in the value of the lira as unrealistic and completely detached from economic fundamentals, “saying he would only intervene in cases of excessive volatility.

Key context

In the grip of years of unorthodox monetary policy, the struggling Turkish lira has erased nearly 70% of its value, against the dollar, over the past five years. The unrest first peaked with a deep depression in 2018, when shares of the country’s financial institutions plunged nearly in half as the lira fell. deteriorated company profits. Although the pound’s value remained fairly stable for years thereafter, it fell into turmoil again amid Erdogan’s efforts to lower interest rates this year. Erodgan went so far as pull sharply three senior central bank officials last month because they raised rates to help control inflation. Now facing lower interest rates, the pound has plunged another 40% this year, making it the worst performing currency in the world.

Chief critic

“This irrational experiment, which has no chance of success, must be abandoned immediately,” said Semid Tumen, a former Turkish central bank official whom Erdogan sacked last month, said noted Tuesday on Twitter. “We must return to quality policies that protect the value of the Turkish lira and the prosperity of the Turkish people.”

What to watch out for

In a note to clients on Tuesday, Goldman Sachs analysts said the lira’s free fall would likely force central bank officials to raise interest rates to 20% in the second quarter of next year. Citi said on Tuesday that the fall in the value of the lira makes it more likely that the central bank will act on interest rates sooner, which in turn should quell the crash.

Further reading

What will Biden do with Turkish President Erdogan? (Forbes)

Sources

1/ https://Google.com/

2/ https://www.forbes.com/sites/sergeiklebnikov/2021/11/23/turkish-liras-historic-crash-heres-why-inflation-and-erdogans-interest-rate-disdain-have-pummeled-turkeys-currency/

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