Turkish Lira falls ahead of possible interest rate decrease

By Al Mayadeen Net
Source: Agencies
15 Dec 2021 17:13

Erdogan had announced an "economic war of independence," employing unconventional methods to boost growth which backfired as the Turkish Lira reached a record low for the third month in a row.

Turkish Lira tumbles into a new level

On the eve of a meeting at which the central bank was expected to decrease interest rates for the fourth month in a row, the Turkish Lira extended its record decline on Wednesday.

The currency has lost half of its value since the beginning of the year, and 30% in the last month alone, as policymakers give in to President Recep Tayyip Erdogan's demands to lower borrowing costs amid rising inflation.

In 2016, a US dollar was exchanged for 3 liras, and on January 1, it exchanged for 7.43 liras. On Wednesday, it was worth 14.70 liras, with a year-on-year increase in consumer prices of more than 20%.

Erdogan has declared an "economic war of independence" in which he fights inflation by lowering borrowing costs, defying conventional market economics.

Instead, central banks around the world are rising or planning to raise rates to offset consumer price increases caused by the Coronavirus outbreak.

Analysts and diplomats believe Erdogan's pro-growth policies were implemented in an attempt to boost declining support ratings ahead of a general election likely in the next 18 months.

Erdogan feels "unchained," according to a senior Western diplomat, after stocking the central bank with loyalists and dismissing ministers who failed to subscribe to his unconventional beliefs.

Increasing risk face Turkish Economy

Turkey imports the vast majority of its raw materials and energy sources as it spends foreign currency on foreign oil and natural gas purchases.

The steady depreciation of the Turkish lira makes these purchases more expensive.

Turkey's net hard currency reserves, according to economists, are dangerously low, and even negative when so-called "currency swap" arrangements with ally countries' banks are taken out.

The central bank has reduced its reserves even further by intervening four times in the last month to protect the currency from more severe single-day drops.

However, the losses are continuing as Turks buy gold, as well as dollars and euros, to protect their money.

S&P Global Ratings was the last major global rating agency to downgrade Turkey's credit outlook last week.