Turkey’s Lira, the world’s worst-performing currency, continues its free-fall – tumbling 39% since September 2021. Though it has been sliding since early 2018, President Recep Tayyip Erdogan’s recent policies are to be blamed. This comes after the central bank cut rates by 100% to 1.5%. Rates were cut by 400 basis points in September alone.
Turkey’s central government debt, according to Fitch, was foreign currency linked or denominated. It means that paying debt becomes more difficult as the lira continues to fall. Erodgan had been pressurizing the central bank to adopt an aggressive easing cycle to help boost investment, exports and jobs. The President argued that higher interest rates stoke inflation and lower rates will cause inflation to fall.
The WSJ says that when interest rates are lower than the rate of inflation, businesses, consumers and foreign investors worry that the purchasing power of the currency will erode. A rapidly weakening currency can create an inflationary spiral because it pushes up the cost of key imports such as food and energy.
Analysts called the rate cuts reckless and uneconomical. Sahap Kavcioglu, the central bank’s Governor, had issued a statement saying the selloff was unrealistic and detached from economic fundamentals. Semih Tumen, former bank deputy governor, took to Twitter to criticize President Erdogan’s decision and called for an immediate return to policies to protect the lira’s value. “This irrational experiment which has no chance of success must be abandoned immediately and we must return to quality policies which protect the Turkish lira’s value and the prosperity of the Turkish people.”
The lira has lost nearly half of its value against the dollar this year. Investors and economists fear it could get worse and take a devastating turn on Turkey’s economy. Furthermore, the central bank’s reduced power means the lira has fallen very steeply.