Turkey’s Lira dived into an uncharted depth on Tuesday as investors saw the central bank bowing to political pressure from President Tayyip Erdogan. The currency plunged 3.7% to a fresh intraday record low of 10.45 against the greenback before ending the day at 10.35 per US dollar, also a new record closing low. Lira has lost 28% of its value this year, making it the weakest emerging market currency.
The Central Bank of the Republic of Turkey has slashed its benchmark interest rate by a total of 300 basis points since September despite red-hot inflation. While inflation spiked nearly 20% in October, the central bank is expected to cut rates further from 16% to 15% this week, influenced by Erdogan’s peculiar view that higher interest rates are “evil” and fuel inflation.
Analysts warned that further reduction in borrowing costs would result in an accelerated sell-off of the Lira, which could trigger a new currency crisis. However, the central bank defended its independence, arguing that inflation is temporary. Turkey was hit by a currency crisis in 2018 which resulted in a recession and subsequent sluggish growth that was exacerbated by the COVID-19 pandemic.
Turkey’s GDP is expected to expand almost 10% this year thanks to strong manufacturing, robust exports, and a rebound in tourism. However, the lira devaluation ramps up companies’ cost to repay their foreign-currency debt. Turkey’s private sector has net foreign liabilities of $124 billion. Ankara’s 58% foreign outstanding debt is also expected to continue rising as the Lira depreciates.
