Lira Collapse Continues After Turkey Central Bank Shocks with Another 100 bp Cut

The Central Bank of Turkey unexpectedly cut its interest rate by 100bps to 13% at its August 2022 meeting on Thursday with concerted pressure from President Recep Tayyip Erdogan wanting rates cut to stimulate the economy. The move surprised markets that expected rates to remain steady at 14%. Turkey gave another great lesson on why Central Banks and Governments should be independent. Turkey’s currency, the lira collapse accelerated further dropped 1 per cent to 18.14 against the US dollar, the weakest level on an intraday basis since late last year.

Meanwhile Turks can’t afford bare necessities as inflation runs rampant from the collapsed currency. Inflation in Turkey has climbed to 80% over the year, a 24-year high. The central bank now predicts inflation will reach a high of around 85% this fall, before ending the year near 60%, or 12 times its target.

Turkey Rising Inflation

“Leading indicators for the third quarter point to some loss of momentum in economic activity,” the bank said in a statement on Thursday. “It is important that financial conditions remain supportive to preserve the growth momentum in industrial production, and the positive trend in employment in a period of increasing uncertainties regarding global growth as well as escalating geopolitical risk.”” the bank said in a statement.

Business conditions among Turkish manufacturers deteriorated the most since May 2020 last month after output and new orders suffered their worst performance since the first wave of the coronavirus pandemic. The threat of a recession in Europe, the main destination for Turkish shipments abroad, is a huge concern for an industry that now accounts for 95% of Turkey’s total exports.

The currency is now worth about half its value at the beginning of the year making imports at least doubly expensive. Turkey’s economy is heavily dependent upon imports for producing goods from basic foods to textiles, so the rise of the dollar against the lira has a direct impact on the price of consumer products.

Turkish Lira Collapse

Erdogan has dug his heals in from the widespread criticism and pleas to reverse course on rates. In the past two years he has sacked three central bank presidents and only this week replaced his finance minister. And so, the lira continues to collapse.

Şahap Kavcioğlu, the Turkish central bank governor, supports president Recep Tayyip Erdoğan’s theory that high interest rates cause inflation, while mainstream economists subscribe to the opposite view.

The theory is an increase of more than $15 billion in Turkey’s gross foreign reserves over the last three weeks, following money transfers from Russia for the construction of a nuclear power plant may have given the central bank the confidence that it can wait out the pressures, especially as policy makers expect inflation to peak soon.

Source: Bloomberg

From The TradersCommunity News Desk