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Turkish lira sinks further as c-bank slashes interest rates

posted onNovember 18, 2021

The Turkish lira depreciated further to an all-time low of near 11 to the U.S. dollar on Thursday (Nov. 18) after the Central Bank of Turkey (CBRT) slashed its one-week repo auction rate by 100bps to 15%. Most other central banks globally move towards tightening policy. 

The lira slipped to 10.98 against the greenback in volatile trade before paring some losses to trade at 10.84. The Turkish currency is down almost 11% in November, making it the worst month for the lira since August 2018. In the midst of a 2018 crisis, the lira shed more than 25% in a week. 

The currency  has fallen over 30% on the US dollar this year and is the worst performer in emerging markets in recent years.  

The CBTR's move comes after a 200bps cut in October and a 100bps cut in September. The annual inflation rate in Turkey edged up to 19.89% last month, the highest since January of 2019- and well above the central bank's mid-point target of 5%- as the lira remained under pressure at record low levels and energy costs surged. Meanwhile, rents have skyrocketed and prices for home sales, mostly pegged on the U.S. dollar, are increasing. 

In comparison, consumer prices in the U.S.  increased by 6% from a year ago — the most since 1990 — while inflation in the euro area exceeded 4%, the highest in 13 years. 

High inflation in Turkey has been hurting the popularity ratings of  the country's President Erdogan, whose early years in power were marked by a strong economy.  

There are also concerns about Erdogan’s influence over monetary policy. He’s appointed four central bank governors since 2019 and fired bankers who are said to have resisted lowering interest rates. 

The Turkish President backs an unconventional theory that high interest rates cause, rather than tame, inflation. Conventional economic theory states the exact opposite is true. 

Jason Tuvey, senior emerging markets economist at London-based Capital Economics, said that CBTR rate setters had defied investors who had "clearly" been pushing for the central bank to stand up against Erdogan's call for lower interest rates. 

The central bank's Committee says price pressures are temporary and expects that the transitory effects of supply-side factors and other factors beyond monetary policy’s control on price increases will persist through the first half of 2022 and it will consider to complete the use of the limited room implied by these factors in December.

The lira's depreciation pushes prices higher in Turkey via imports and raises default risks for companies with foreign currency debt.

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