Lira plunges as Turkey cuts interest rate again

AFP , Thursday 16 Dec 2021

The Turkish lira on Thursday hit fresh lows after the central bank fired the latest salvo in President Recep Tayyip Erdogan's "economic war of independence" by cutting interest rates for the fourth successive month.

Turkish shop
Tourists shop inside spice bazaar at Eminonu district in Istanbul on December 16, 2021. AFP

The reduction of the main rate to 14 from 15 percent comes in the face of an annual inflation rate that has surged past 20 percent and is expected to climb even higher over the next few weeks.

The lira was trading down nearly four percent immediately after the announcement.

"The accompanying statement suggests that the easing cycle will be on pause early next year but, even so, the lira will remain under pressure and capital controls are likely," the Capital Economics consultancy said in a research note.

The lira has shed more than half its value since the start of the year -- and 30 percent in the last month alone -- as policymakers bow to Erdogan's wishes to bring down borrowing costs despite soaring inflation.

This unorthodox approach has wiped out the value of people's saving and thrown swaths of Turkish society below the official poverty line.

A dollar could buy three liras in 2016 and 7.43 liras on January 1. It was worth 15.35 liras on Thursday after opening the week at around the 13.80 mark.

But Erdogan has called for "patience" and argued that his approach will ultimately make Turkey less dependent on outside factors such the the scale of foreign investment and the price of commodity goods.

He has also promised to significantly raise the minimum wage.

Possible Pause?

Analysts and diplomats believe Erdogan unleashed his pro-growth policy in a bid to revive sagging approval numbers ahead of a general election due within the next 18 months.

The veteran Turkish leader is trying to fight spiralling inflation by bringing down borrowing costs -- the exact opposite of what countries usually do in similar situations.

Central banks around the world are currently raising or winding down their cheap money policies to combat consumer price jumps caused by factors related to the coronavirus pandemic.

The Turkish central bank blamed most of last month's consumer price increases on "supply side factors such as the rise in global food and agricultural commodity prices, supply constraints, and demand developments."

It said it would reassess "all aspects of the policy framework" over the first three month of 2022.


Erdogan has cited China as an example as he pushes for economic growth at all costs.

China brought down the value of its currency to boost exports and achieve spectacular rates of economic expansion over much of the past two decades.

This created a new middle class that helped China achieve more sustainable consumer-driven growth.

Turkey's economy also expanded at an annual rate of 7.4 percent between July and September.

But most analysts believe Erdogan's attempts to boost jobs and propel economic expansion through cheap exports are likely to end in social turmoil.

One senior Western official said Erdogan feels "unchained" after stacking the central bank with allies and ousting ministers who refused to subscribe to his unorthodox views.

"There is nobody around him anymore who can rein in this fundamental belief of his, whether it stems from his Islamic principles, or shopkeeper mentality, or combination of the two -- he genuinely thinks this is going to work," the Western official said.

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