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In this illustration taken on November 28, 2021, you can see that Turkish Lira banknotes are placed on U.S. dollar bills. REUTERS/Dado Ruvic/Illustration
Reuters, Istanbul, November 30-The Turkish lira plunged to 14 against the U.S. dollar on Tuesday, hitting a new low against the euro. After President Tayyip Erdogan once again supported a sharp interest rate cut, despite widespread criticism and soaring currency Swell.
The lira fell 8.6% against the U.S. dollar, boosting the U.S. dollar after the Fed’s tough remarks, highlighting the risks faced by the Turkish economy and Erdogan’s own political future. read more
So far this year, the currency has depreciated by about 45%. In November alone, it has depreciated by 28.3%. It quickly eroded the income and savings of Turks, disrupted family budgets, and even made them scrambling to find some imported medicines. read more
The monthly sell-off was the largest ever for the currency, and it joined the crises of large emerging market economies in 2018, 2001 and 1994.
On Tuesday’s plunge, Erdogan defended what most economists call reckless monetary easing for the fifth time in less than two weeks.
In an interview with the national broadcaster TRT, Erdogan stated that the new policy direction “has no turning back”.
“We will see a significant drop in interest rates, so the exchange rate will improve before the election,” he said.
Turkey’s leaders for the past two decades have faced a decline in public opinion polls and a vote in mid-2023. Opinion polls show that Erdogan will face the most likely presidential opponent.
Under Erdogan’s pressure, the central bank has cut interest rates by 400 basis points to 15% since September, and the market generally expects to cut interest rates again in December. Since the inflation rate is close to 20%, the real interest rate is extremely low.
In response, the opposition called for an immediate reversal of the policy and early elections. Concerns about the credibility of the central bank were hit again on Tuesday after a senior official was reported to have left.
Brian Jacobsen, senior investment strategist for multi-asset solutions at Allspring Global Investments, said: “This is a dangerous experiment that Erdogan is trying to conduct, and the market is trying to warn him about the consequences.”
“As the lira depreciates, import prices may rise, which intensifies inflation. Foreign investment may be scared off, making it more difficult to finance growth. Credit default swaps are priced higher in default risk,” he added.
According to data from IHS Markit, Turkey’s five-year credit default swaps (the cost of insuring sovereign defaults) rose by 6 basis points from Monday’s close to 510 basis points, the highest level since November 2020.
The spread on safe-haven US Treasury bonds (.JPMEGDTURR) widened to 564 basis points, the largest in a year. They are 100 basis points larger than earlier this month.
According to official data released on Tuesday, Turkey’s economy grew by 7.4% year-on-year in the third quarter, driven by retail demand, manufacturing and exports. read more
Erdogan and other government officials emphasized that although prices may continue for some time, monetary stimulus measures should boost exports, credit, employment and economic growth.
Economists say that devaluation and accelerated inflation-expected to reach 30% next year, mainly due to currency devaluation-will undermine Erdogan’s plan. Almost all other central banks are raising interest rates or preparing to do so. read more
Erdogan said: “Some people are trying to make them look weak, but the economic indicators are in very good condition.” “Our country is now at a point where it can break this trap. There is no turning back.”
Reuters reported that citing sources, Erdogan has ignored calls for policy changes in recent weeks, even from within his government. read more
A central bank source said on Tuesday that Doruk Kucuksarac, executive director of the bank’s market department, had resigned and was replaced by his deputy Hakan Er.
A banker, who requested anonymity, said that the departure of Kukuk Salak further proved that the institution was “eroded and destroyed” after this year’s large-scale leadership reforms and years of political influence on policy.
Erdogan fired three members of the Monetary Policy Committee in October. Governor Sahap Kavcioglu was appointed to the position in March after he fired three of his predecessors due to policy differences in the past 2-1/2 years. read more
November inflation data will be released on Friday, and a Reuters survey predicts that the inflation rate will rise to 20.7% for the year, the highest level in three years. read more
Credit rating company Moody’s said: “Monetary policy may continue to be affected by politics, and it is not enough to significantly reduce inflation, stabilize the currency, and restore investor confidence.”
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