Turkey A Lesson in Why Central Banks Need to Be Independent as Lira Collapses Accelerates

Turkey is a great lesson on why Central Banks and Governments should be independent. Turkey’s currency, the lira collapse accelerated further after its central bank cut its main interest rate by 1%, from 15% to 14% on Thursday with concerted pressure from President Recep Tayyip Erdogan wanting rates cut to stimulate the economy. Meanwhile Turks can’t afford bare necessities as inflation runs rampant from the collapsed currency. Inflation in Turkey has climbed above 21.7% over the year.

Turkey Rising Inflation

“The Committee decided to complete the use of the limited room implied by transitory effects of supply-side factors and other factors beyond monetary policy’s control on price increases,” the bank said in a statement.

Turkey’s central bank has now lowered the benchmark by 500 basis points since September. The cuts drove down the lira, which weakened past 15 per dollar for the first time on Thursday and was over 17 by Friday as investors anticipated another rate reduction.

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.

The recent interest rate reductions see real yields flop deeper into negative territory as consumer inflation climbs. Inflation expectations for the next 12 months surged to 21.39% from 15.61%, according to the central bank’s December survey of market participants.

The Turkish central bank is expected to publish its main framework of monetary and exchange rate policy for 2022 before the end of the year. The statistics agency will publish December inflation data on Jan. 3.

Source: Reuters

From The TradersCommunity News Desk