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In Turkey, inflation has reached about 20%. Implying that essential items for the country’s 85 million people have skyrocketed in price and their local currency incomes have been badly depreciated.
On Tuesday, Turkey’s lira fell to a historic low of 13.44 to the dollar. It was a previously unimaginable level that was well over what was only last week termed the “psychological” barrier of 11 to the dollar.
To put things in perspective, the lira was trading at around 5.6 to the dollar at this time last year. And it was already making news due to the huge drop in value from the mid-2017 level of 3.5 to the dollar.
According to Reuters, the lira was trading at 12.7272 to the US$ at 4 p.m. local time on Tuesday. It was down about 15% on the day at one point.
The sell-off was sparked after Turkish President Recep Tayyip Erdogan supported his central bank’s ongoing controversial interest rate reduction in the face of mounting double-digit inflation. He described the action as part of an “economic battle of independence,”. In the process dismissing investor and expert requests to reverse direction.
Turkey’s currency has been falling since early 2018. This fall is a result of geopolitical concerns with the West, current account deficits, diminishing currency reserves, and increasing debt. But most critically, an unwillingness to boost interest rates to reduce inflation.
Investors are concerned about Turkey’s central bank’s lack of independence. Since its monetary policies are perceived as being heavily influenced by Erdogan. In the last two years, he has sacked three central bank presidents due to policy disputes.
Semih Tumen, a former central bank deputy governor fired by Erdogan in October, slammed the president’s actions. “We must abandon this foolish experiment with no chance of success. And return to quality policies that will protect the value of the Turkish lira and the well-being of the Turkish people,” Tumen stated on Twitter, according to a translation.
The most recent dramatic drop began last Thursday. When the central bank slashed interest rates by 100 basis points to 15%. It has reduced interest rates by 400 basis points since September alone.
According to the rating agency Fitch, 57 percent of Turkey’s central government debt was tied or denominated in foreign currency in August. Implying that repaying that debt will become more difficult if the lira continues to fall in value.
“We are witnessing a strange economic experiment of what occurs when a central bank virtually has no monetary policy,” Ash explained.
Erdogan has revoked the CBRT’s (Turkish Central Bank’s) power to raise policy rates.