The Turkish central bank is cutting interest rates, sending the lira to a record low

Turkish President Tayyip Erdogan addresses the media after a cabinet meeting in Ankara, Turkey, on December 8, 2021.

Murat Cetinmuhurdar | Reuters

Turkey’s central bank voted on Thursday to cut the country’s key interest rate, a one-week repo rate, to 1[ads1]4% from 15%, sending the lira to a new record low of 15.5 to the dollar immediately after the news.

The currency had already broken 15 against the dollar in the hours before the decision when the markets expected an interest rate cut. The lira traded at around 15.51 against the dollar just after 2 pm in Istanbul.

Inflation in the country of 84 million is now more than 21% and has risen steadily as President Recep Tayyip Erdogan has refused to raise interest rates, which means that the purchasing power of Turks earning local wages has plummeted. The lira has lost 50% of its value against the dollar so far this year.

Investors and economists have desperately asked Erdogan to turn the tide, but he has so far held on to his unusual belief that higher interest rates exacerbate inflation, rather than cooling it, as is the widely accepted economic principle.

The move follows a long series of interest rate cuts from the central bank, which is seen by markets as not independent of Erdogan, who has called the interest rate “the mother of all evil”.

Turkey’s central bank previously announced that it intervened directly in the foreign exchange market on Monday, selling dollars to support the lira. But given the already low foreign exchange reserves, analysts doubt that the strategy will be effective.

Analysts have called the current lira route the second currency crisis for Turkey in three years. In the first half of 2018, investors were already sounding the alarm due to the central bank’s lack of independence from Erdogan, when the lira broke what at that time was a record low of 4 and then 5 lira to the dollar. To imagine the currency falling through 15 to the dollar was unimaginable at the time.

And the rate of fall has been almost exponential; the fall from 3 lira to dollar to 4 took two years from 2016, while the currency fell from 10 to 15 to dollar in about six weeks from november.

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