Turkish lira dives 10 percent after Erdoğan doubles down on low rates

Turkey’s lira slumped by 10 percent against the dollar on Tuesday after President Recep Tayyip Erdoğan doubled down on a pledge to keep interest rates at below inflation to spur economic growth and exports.

Speaking on Monday, Erdoğan reiterated his unorthodox belief that higher interest rates were inflationary and vowed to emerge victorious from “an economic war of independence”.

The lira dropped to as low as 12.48 per dollar in Istanbul. It was trading down 7.7 percent at 12.25 per dollar at midday local time. Losses this year total almost 40 percent.

"It’s like the car, which is the Turkish economy, has been driven to the top of the hill and Erdoğan just cut the brake cable," said Tim Ash, senior emerging markets strategist at BlueBay Asset Management.  

The central bank has lowered interest rates to 15 percent from 19 percent over the past three months, even as inflation accelerated to almost 20 percent. Other emerging markets across the world are tightening monetary policy to deal with an upsurge in global inflation.

Erdoğan, who gained vast executive powers at elections in 2018, has exerted full authority over central bank policy after sacking three governors since 2019 and replacing a majority of its senior management.

Turkey may be in the middle of a currency crisis reminiscent of extreme volatility seen in 2018, London-based research firm Capital Economics said last week. The experience from 2018 shows that intraday falls of more than 10 percent were possible, it said.

The central bank has indicated that it will cut rates again in December after lowering borrowing costs to 15 percent from 16 percent last week.

Turkey is finding out the hard way how a currency crisis can take longer to occur than anticipated, but then proceed faster than thought possible, Desmond Lachman, a fellow at the American Enterprise Institute and a former IMF official, said in a column for Barron’s on Friday.

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