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Why is the Turkish currency in free fall?

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The Turkish lira is in free fall as President Recep Tayyip Erdogan has championed interest rate cuts despite soaring inflation.

The currency hit a record low this week – topping 13 per dollar – and has lost more than 43 percent of its value against the US greenback since the start of the year.

Here are some key questions about the collapse of the pound:

– Why does reading it crash? –

Erdogan insisted that interest rates should come down this summer, believing it unorthodox that high rates equate to high inflation.

The central bank has since cut the policy rate by 400 basis points, raising doubts about its independence. In his latest ruling last week, he suggested another cut was likely in December.

But the problems of reading it run deeper.

Erdogan, who sacked three central bank governors since July 2019, refused to accept any responsibility for the collapse of the pound.

“I reject policies which will condemn our people to unemployment, hunger and poverty,” he said on Monday, warning that the country was in a “war of economic independence”.

Kerim Rota, who is in charge of economic policy in the opposition Future Party, said the lira suffered the worst monthly devaluation since 1994, and the second worst in the past 40 years.

“If it hits 14.25 (per dollar) at the end of the month, it will be the highest. It’s now out of control, it’s clear to see,” Rota told Halk TV in an interview. Tuesday.

The Turkish currency rose on Wednesday, trading at less than 12 lire to the dollar.

– What are the risks ? –

While many say Turkey’s banking sector has been stronger since the 2001 economic crisis, the impact on banks and the potential for capital controls are cause for concern.

“Banks are better positioned to deal with the fallout from a weaker pound than they were a few years ago,” said Jason Tuvey, emerging markets analyst at Capital Economics.

But, he added, “the risk is that the lira will suffer further sudden and disorderly drops that trigger problems in the banking sector. A credit crunch could ensue and weigh heavily on economic activity.”

Any sign of a “flood of withdrawal requests” from foreign currency deposits would likely trigger more aggressive capital controls, he warned.

More than half of all deposits in Turkish banks are in foreign currencies, mostly dollars.

Turkey’s official inflation target is 5%, but has remained stubbornly in double digits for the past two years, hovering around 20% last month.

Opposition parties say real inflation is much higher than official data shows.

Given the situation, the opposition called for a snap election ahead of a vote scheduled for June 2023, but Erdogan pledged on Tuesday that “there would be no snap elections.”

– What does Erdogan expect? –

The president prioritizes growth, with the economy expected to grow 9% in 2021 and 3.5% in 2022.

During another currency crisis in 2018, the central bank aggressively increased the main interest rate, but the likelihood of a repeat under a more determined Erdogan is low.

Some pundits have accused the president of seeking to make Turkey more attractive as a hub for cheap production with Turkish wages worth less in dollars.

Turkey’s monthly net minimum wage of 2,825.90 lire stood at $ 380 in January 2021, but was equivalent to $ 222 on Wednesday.

“Until recently, Team Erdogan’s ‘2023 goals’ included becoming a post-industrial powerhouse and high-tech leader. Now it’s about making Turkey a source of labor. super-cheap artwork, “tweeted Timur Kuran, professor at Duke University.

bur-raz / ach / lth

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