Turkish President Recep Tayyip Erdogan attends a press conference in Budapest, Hungary on November 7, 2019.
Bernadett Szabo | Reuters
The Turkish lira fell to another record low of 12.49 per dollar on Tuesday, a once unfathomable level and well above the “psychological” limit of 11 per dollar that was classified as “psychological” as recently as last week.
“Insane where the lira is, but it is a reflection of the insane monetary policy framework Turkey is currently operating in,” said Tim Ash, senior emerging markets strategist at Bluebay Asset Management, in a statement in response to the news.
The lira was traded at 12,168 against the greenback at 1:00 p.m. local time on Tuesday.
The sell-off was triggered after Turkish President Recep Tayyip Erdogan defended his central bank’s ongoing controversial rate cuts amid rising double-digit inflation. He described the move as part of an “economic war of independence” and rejected calls from investors and analysts to change course.
Inflation in Turkey is now close to 20%, meaning that basic goods for the Turks – a population of around 85 million – have risen in price and their salaries in local currency have been devalued sharply. According to Reuters, the lira has lost almost 40% of its value this year and 20% since the beginning of last week alone.
For perspective, the lira was trading at around 5.6 per dollar at this point in 2019. And that already made headlines, because it was a dramatic loss in value from 3.5 to the dollar in mid-2017.
The Turkish currency has been on a downtrend since early 2018, thanks to a combination of geopolitical tensions with the West, current account deficits, shrinking currency reserves and rising debt – but most of all a refusal to raise interest rates to cool inflation.
Erdogan has long referred to interest rates as “the enemy” and rejects economic orthodoxy to insist that increasing interest rates actually makes inflation worse, not the other way around.
Investors fear the lack of independence of the Turkish central bank, whose monetary policy is largely controlled by Erdogan. He fired three central bank governors over political differences in about two years.
Semih Tumen, a former deputy central bank governor whom Erdogan dismissed in October, sharply criticized the president’s moves.
“We must give up this irrational experiment that has no prospect of success and return to a quality policy that protects the value of the Turkish lira and the well-being of the Turkish people,” Tumen wrote, according to a translation on Twitter.
The most recent sharp downturn began last Thursday when the central bank cut rates by 100 basis points to 15%. It has cut rates by 400 basis points since September alone.
According to the rating agency Fitch, 57% of Turkey’s national debt was denominated in foreign currencies or foreign currencies in August.
“We’re seeing a perverse economic experiment, what happens when a central bank has virtually no monetary policy,” said Ash.
“Erdogan has taken the CBRT (Central Bank of Turkey) the opportunity to raise the key interest rate.”