Turkish lira plunges to record lows after Erdogan triggered sell-off

Turkish President Recep Tayyip Erdogan attended a press conference in Budapest, Hungary on November 7, 2019.

Bernadette Sabo | Reuters

Turkish lira Fell to a record low of 12.49 to Dollar On Tuesday, the once unfathomable level far exceeded what was seen as a “psychological” obstacle to the US dollar exchange rate11 last week.

Tim Ash, senior emerging market strategist at Bluebay Asset Management, said in a report in response to the news: “The position of the lira is crazy, but it reflects the crazy monetary policy environment Turkey is currently in.”

At 1 pm local time on Tuesday, the exchange rate of the lira to the US dollar was 12.168.

The sell-off was triggered after Turkish President Recep Tayyip Erdogan defended his central bank’s continued controversial rate cut amid rising double-digit inflation. He referred to this move as part of the “War of Economic Independence” and rejected calls from investors and analysts to change course.

Turkey’s inflation rate is now close to 20%, which means that the prices of basic commodities for the Turks (about 85 million people) have soared and their local currency wages have been severely devalued. According to Reuters, the lira has depreciated nearly 40% this year, and 20% since the beginning of last week.

From a perspective, at this time in 2019, the exchange rate of the lira to the U.S. dollar is about 5.6. This has become news because its value has fallen sharply from 3.5 USD to USD in mid-2017.

‘Irrational experiment’

Due to geopolitical tensions with the West, current account deficits, shrinking currency reserves and increasing debt, Turkey’s currency has been declining since the beginning of 2018-but most importantly, Turkey refused to raise interest rates to cool inflation.

Erdogan has long described interest rates as the “enemy”, rejecting the economic orthodoxy that a rise in interest rates will actually worsen inflation, not the other way around.

Investors worry that the Turkish central bank lacks independence, and its monetary policy is considered to be mainly controlled by Erdogan. Due to policy differences, he fired three central bank governors in about two years.

Semih Tumen, the former deputy governor of the Central Bank who was fired by Erdogan in October last year, severely criticized the president’s actions.

According to the translation, Tumen wrote on Twitter: “We need to abandon this irrational experiment that has no chance of success and return to a quality policy to protect the value of the Turkish lira and the well-being of the Turkish people.”

The most recent sharp decline began last Thursday, when the central bank lowered interest rates by 100 basis points to 15%. Since September, it has reduced interest rates by 400 basis points.

According to data from the rating agency Fitch, 57% of Turkey’s central government debt was pegged or denominated in foreign currencies in August, which means that as the lira continues to depreciate, debt repayment becomes more painful.

“We are seeing an abnormal economic experiment, what happens when the central bank actually has no monetary policy,” Ash said.

“Erdogan has deprived the CBRT (Central Bank of Turkey) of the ability to raise policy interest rates.”

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