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Turkish lira nose-dives 15% as president defies critics

ART GALLERY

The Turkish lira nose-dived 15% on Tuesday after President Tayyip Erdogan defended a controversial plan to cut interest rates to boost the economy.

The lira fell to a record low of just over 13 lira to the dollar before recovering slightly, marking 11 consecutive days of declines.

Mr. Erdogan has pushed Turkey’s central bank to cut interest rates three times since September, the most recent being last week.

However, this has been blamed for driving up inflation, which is now at 20%.

Investors are losing faith, and the lira has lost nearly half its value this year, making it the world’s worst performing currency.

Despite this, Mr Erdogan vowed to stick to his policies on Monday, claiming that high interest rates would not reduce inflation – an unconventional viewpoint he has repeated for years.

“I reject policies that will contract, weaken, and condemn our people to unemployment, hunger, and poverty,” he said following a cabinet meeting.

“We see the game being played by those over currency, interest, and price increases… and demonstrate our willingness to proceed with our own game plan,” he added.

Lower interest rates, according to the president and his supporters, will boost Turkish exports, investment, and job creation. Many economists, however, believe the rate cuts are reckless.

President Erdogan believes that raising interest rates leads to inflation and that the best way to combat rising prices is to make money cheaper.

It is, to say the least, an unusual point of view. According to conventional wisdom, raising interest rates encourages saving, reduces expenditure, and thus slows price increases.

The president is adamant that his way or the highway. In March, he fired the Bank’s governor, Naci Agbal, who had been aggressively raising interest rates. Soon after, two of his deputy governors arrived.

Mr Erdogan now wields power. Last week saw the latest in a series of rate cuts, which triggered an even deeper decline in the lira’s value.

He said yesterday that the country was fighting for its “economic independence.”

It is also involved in what appears to be a risky economic experiment.

Semih Tumen, the president’s former deputy governor who was fired last month amid a leadership shake-up, has called for a return to policies that protect the lira’s value.

“This irrational experiment with no chance of success must be abandoned immediately, and we must return to quality policies that protect the value of the Turkish lira and the prosperity of the Turkish people,” he wrote on Twitter.

According to polls, Mr. Erdogan’s AK Party is losing support as a result of the situation, and opposition politicians have called for early elections.

He does, however, have the support of his party and other allies in Turkey’s parliament.

The lira’s drop on Tuesday was the worst since the lira’s peak during a currency crisis in 2018, which triggered a sharp recession and three years of weak economic growth and double-digit inflation.

Despite recovering half of its losses by 2 p.m. UK time on Tuesday, the lira has had its worst 11-day run since 1999.

‘Breaking point’

According to analysts, emergency rate hikes will be required soon to avert a worsening economic crisis.

Rates are expected to rise to around 19 percent by the end of the first quarter of 2022, according to the French investment bank Societe Generale. The country’s current benchmark rate is 15%.

Mr Erdogan, according to Ilan Solot, global market strategist at Brown Brothers Harriman, is likely to wait until a “breaking point” before changing course.

“Locals appear to be content for the time being to keep their money in the local system. It’s a different storey if they start moving money elsewhere, to Germany or Austria “Mr Solot told the news agency Reuters.

“At that point, we’re discussing capital controls. There are insufficient dollar reserves and dollars in the system to handle this. Then we’ll talk about the possibility of a real currency crisis “He continued.

SourceBBC
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