Turkish President Tayyip Erdogan addresses the media after a cabinet meeting in Ankara, Turkey, December 8, 2021.
Murat Cetinmuhurdar | Reuters
Turkey’s central bank voted on Thursday to cut the country’s key interest rate, the one-week repo rate, to 14% from 15%, sending the lira to a new record low of 15.5 to the dollar immediately following the news.
The currency had already breached 15 to the dollar in the hours before the decision as markets anticipated a rate cut. The lira was trading at around 15.51 to the dollar just after 2 p.m. in Istanbul.
Inflation in the country of 84 million is now at more than 21% and has climbed steadily as President Recep Tayyip Erdogan has refused to raise rates, meaning purchasing power for Turks earning local salaries has plunged. The lira has lost 50% of its value against the dollar year to date.
Investors and economists have been desperately calling for Erdogan to reverse course, but he’s so far stuck to his unusual conviction that higher rates worsen inflation, rather than cooling it, as is the widely accepted economic principle.
The move follows a long series of rate cuts from the central bank, which is seen by markets as not independent from Erdogan, who has called interest rates “the mother of all evil.”
Turkey’s central bank previously announced it was intervening directly in the foreign exchange market on Monday, selling dollars to prop up the lira. But given its already low FX reserves, analysts doubt the strategy will be effective.
Analysts have called the current lira rout the second currency crisis for Turkey in three years. In the first half of 2018, investors were already sounding the alarm at the central bank’s lack of independence from Erdogan as the lira breached what was, at the time, a record low of 4 and then 5 lira to the dollar. To imagine the currency falling through 15 to the dollar was at the time unfathomable.
And the speed of the drop has been almost exponential; the drop from 3 lira to the dollar to 4 took two years beginning in 2016, while the currency plummeted from 10 to 15 to the dollar in about six weeks beginning in November.