Turkish currency falls to low, central bank intervenes

For 1 euro you now get almost 15 Turkish lira. At the beginning of November, there were still 11, that’s how fast the Turkish currency is depreciating.

The fact that the lira is falling so sharply against other currencies is a direct result of President Recep Erdogan’s economic policy. The central bank, which is on the president’s leash, continues to cut interest rates. And that causes the lira to fall further in value.

Lower interest rates, right?

A lower interest rate makes borrowing easier, and that way more money enters the Turkish economy. That’s an excellent plan when a currency’s depreciation, inflation, is low and the economy needs to be revived. But if inflation is more than 20 percent, as in Turkey, a lower interest rate will only lead to more inflation.

If more money is put into circulation, it simply becomes less scarce. And as a result, its value decreases. Yesterday, the currency fell to a low against the dollar after Erdogan once again pushed for additional rate cuts.

Then why are they doing it?

The Turkish president is persevering in the policy precisely because he is convinced that economic growth outweighs inflation, against all advice. The low exchange rate of the lira ensures that Turkish companies can export very cheaply. This is good for the country’s competitive position.

Erdogan wants Turkey to become much more of an export economy in the future and to import less by producing as much as possible itself. If you don’t have to buy stuff abroad, a weak currency is no problem, is the reasoning.

But for the time being, the downside of that policy seems to weigh more heavily. Importing stuff becomes almost unaffordable with such a weak currency, which means that inflation will only increase further and people will therefore have less money left over.

The Turkish central bankers often try to go against Erdogan’s wishes. But that doesn’t help. In recent years, the central bank’s chief executive has been replaced several times when they expressed reservations about the strategy.

How do the Turks feel about inflation?

In Turkey, life is now very quickly becoming more expensive. Inflation is thus between 20 and 30 percent. This means that for a basket of groceries for which they paid 100 lira last year, Turks now lose 120 or 130 lira.

Especially things that have to come from abroad are much more expensive.

What is the central bank doing now?

Today, the Turkish central bank decided to intervene anyway. Not by lowering interest rates, but by selling dollars. At least that intention has been announced.

By selling dollar reserves and buying liras back for them, the amount of liras in circulation shrinks. That, at least in theory, boosts the value a bit. Immediately after the announcement, the lira rose by more than 8 percent against the dollar and the euro, but now hardly anything is left of it. 1 euro is again worth 15 lira, just like this morning.

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