The Turkish lira fell to 10.24 against the U.S. dollar, a decline of more than 1.7 percent on Tuesday alone. The move came due to expectations of an upcoming interest rate cut by the country’s central bank. Tuesday’s declines came after the USD/TRY pair hit all-time lows of 9.94 last Thursday. The recent decline in the lira was exacerbated by hotter-than-expected inflation data out of the U.S. last week.
Since September 2021, the Turkish central bank has cut interest rates from 19 percent to 16 percent, even as inflation skyrockets by some 20 percent and prices continued to rise across the globe. The bank’s unconventional fiscal policy may leave the country vulnerable to increased global financial volatility, analysts argue, as investors are likely to opt for safe-haven assets like gold or cryptocurrencies. The lira has declined approximately 30 percent against the U.S. dollar since March 2021.
Turkish President Recep Tayyip Erdogan has continually commented that keeping interest rates high will cause inflation, a view widely discredited by traditional economic policymakers and analysts. Erdogan has fired three central bank governors in less than three years. Last month, Erdogan also fired three of the central bank’s seven-person monetary policy committee.
Central banks around the world have lately been planning to raise interest rates and/or cut back on monetary stimulus efforts in order to stem inflation. Erdogan’s calls to raise interest rates are directly in conflict with these global efforts.
The lira has been the worst performer of all emerging markets in recent years, losing two-thirds of its value in the past five years. In addition to these troubles, Turkish companies and the government have $13 billion in external debt due before the end of 2021, with about $8 million due this month. These repayments have historically raised demand for foreign currency, which puts pressure on the lira and highlights why cutting interest rates, as Erdogan has demanded, is not in the best interests of the country.
Turkey’s economic policymakers will be meeting on Friday to determine the country’s interest rates.