Turkish lira plummets to historic low after Erdogan sparks selloff
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Turkish President Recep Tyyip Erdogan attended a press conference in Budapest (Hungary) November 7, 2019.
Bernadett Szabo | Reuters
Turkey’s liraRecord low at 12.49 the dollarTuesday’s price was at an unimaginable level, well above what was only last week called the “psychological” barrier 11 to one dollar.
Bluebay Asset Management senior emerging market strategist Tim Ash said that the situation was insane where the lira stands, and it is a result of the crazy monetary policies Turkey has currently been operating under.
At 1:48 p.m. on Tuesday, the lira traded at 12.168 against the greenback.
Turkish President Recep TAYYIP Erdogan had defended central bank interest rate cuts despite rising double-digit inflation. This prompted the selloff. The move was branded an “economic war for independence” by Erdogan, who rejected calls from analysts and investors to reverse course.
Inflation in Turkey is now near 20%, meaning basic goods for Turks — a population of roughly 85 million — have soared in price and their local currency salaries are severely devalued. According to Reuters, the lira lost almost 40% this year and 20% just last week.
To put it in perspective, the value of the lira at the time was roughly 5.6 per dollar at the same point in 2019. This was already breaking news as the lira was trading at 5.6 to the dollar, a drastic drop from its mid-2017 value of 3.5 dollars.
‘Irrational experiment’
Turkey’s currency has been in a downward slide since early 2018, thanks to a combination of geopolitical tensions with the West, current account deficits, shrinking currency reserves, and mounting debt — but most importantly, a refusal to raise interest rates to cool inflation.
Erdogan, who has always called interest rates “the enemy”, rejects economic orthodoxy and insists that rising rates will actually make inflation worse than it is the other way round.
Turkey’s central banking independence is a concern for investors. Erdogan controls a large part of its monetary policy. Three central bank chiefs have been fired by Erdogan in the past two years because of policy disagreements.
Semih Tumen was a former deputy governor of the central bank who Erdogan fired in October. She sharply criticised Erdogan’s actions.
Tumen posted the following tweet, in a translation.
On Thursday, the central bank reduced rates by 100 basis point to 15%. Since September, it has cut rates by 400 points.
Fitch Ratings Agency says that in August, 57% of Turkey’s central debt was linked to foreign currencies or denominated. As the currency’s value continues to fall, it makes paying for this debt more expensive.
Ash stated, “We’re witnessing a perverse experiment in economics of what happens to a central bank when it effectively has no monetary policies.”
“Erdogan has removed the CBRT (Central Bank of Turkey),’ ability of CBRT to increase policy rates.”
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