Tuvan Gumrukcu, Ezgi Erkoyun

ISTANBUL (Reuters – The Turkish lira dropped sharply on Wednesday, as the central banks said they had been forced to intervene due to market conditions that were “unhealthy”. Meanwhile President Tayyip Erdogan has intensified his rate-cutting strategy before election.

After the volatile market in low liquidity saw emerging currency’s second-worst November ever, it was hampered by Erdogan’s support of monetary easing despite high inflation and wide criticism.

Erdogan has restructured and pressured Erdogan’s central bank to make it clear that they “directly” intervened on the markets by “selling transactions due too unhealthy price formations in exchangerates”.

After falling as low as 13.87 against the U.S currency earlier, the lira rose to 12.42, a gain of over 8%. At 13.25, however, the lira was 1.2% more firm at 1108 GMT.

On Tuesday, the Turkish government defended its economic policies and the dollar was aided by hawkish remarks from the Federal Reserve. This led to the lira falling to an all time low of 14.0.

Erdogan then reiterated his support for low interest rates Wednesday afternoon, for the sixth consecutive time, and told Turks to behave with reason, avoid panic, and promised to quickly fix inflation.

“Turkey is now abandoning the monetary policies based on high rates of interest that caused many countries in developing nations to stay stagnant,” he stated to parliamentarians from his ruling AK Party.

He stated, “Instead, I have switched to a Growth Strategy aiming at investment, employment, and production” He said that interest rates were a problem because they make the wealthy richer while making the poor poorer.

As much as 47% has been lost in value, the currency plummeted 30% by November. This rapidly degrading Turks’ savings and earning, created a chaos within their household budgets, and forced them to search for import medicines.

No turning back

Erdogan spoke to TRT, the state broadcaster, Tuesday night, and stated that there is “no turning back” on the new policy. He also defended an easing policy most economists consider reckless.

He stated that “we will see that interest rates will drop markedly” and thus there would be an improvement of exchange rates prior to the election.

No polls will be held after mid-2023.

Brian Jacobsen from Wisconsin, senior investment strategist for multi-asset solutions at Allspring Global Investments said that Erdogan’s experiment is dangerous and that the market is warning him.

Inflation is worse because imports will likely rise in value as the lira drops. This could lead to foreign investments being withdrawn, which would make it difficult for growth financing. Credit default swaps price in higher default risk,” he said.

“Investors get more nervous. … It is a poisonous brew.

The lira’s last month sell-off was comparable to the crises that major emerging markets economy had to face in 2018 and 1994.

Erdogan’s AK Party (which came to power after the 2001 crisis) is experiencing a drop in support in opinion polls. These polls show Erdogan will lose face-to-face with his most likely presidential rivals.

Erdogan’s pressure has caused the central bank to cut its policy interest rate by 400 basis point from September to 15%. This leaves real rates in a negative position and an inflation of close 20%. The central bank is expected to reduce it once again in December.

Opposition members have called for an immediate reverse of current policy and quick elections.

Economists believe Erdogan’s plan will be undermined by devaluation and increased inflation, which could reach 30% in the next year. Nearly all central banks have raised rates, or are preparing for it.

On Friday, November inflation data will become available. A Reuters poll predicts that the annual rate will reach 20.7%. This is the highest point in three years.

Figures released Wednesday showed that retail prices in Istanbul, Turkey’s biggest city, rose 4.71% in November – an increase of 24.05% annually.