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Turkish lira plummets at unprecedented rate

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The Turkish lira on Wednesday reached a new record low, trading at 8.23 to the US dollar amid Turkish President Recep Tayyip Erdoğan‘s negative attitude towards high interest rates and his recent harsh rhetoric aimed at Western leaders.

On Monday alone the Turkish lira had lost 1.5 percent of its value. The lira has the highest depreciation among developing countries.

Contrary to market expectations, Turkey’s central bank was unable to raise the policy rate last week due to Erdoğan’s anti-interest stance. The decision is considered by experts to have had an impact on the lira’s rapid decline this week. The exchange rate has increased by 5 percent since the decision to keep the interest rate constant. The lira has fallen 28 percent against the US dollar since the beginning of the year.

In recent years Turkey’s institutions, including the independent central bank, have come under Erdoğan’s control. Recent friction with the US over sanctions and with France over a call to boycott French goods have also played role in the lira’s decline.

 Tensions between Turkey, the EU and the US have exacerbated broader concerns about Erdoğan’s stewardship of the economy.

Economist Atilla Yeşilada said on his YouTube channel that the central bank has made a historic mistake.

“The central bank made a historic mistake by keeping policy rates steady. Foreign investors have completely lost confidence in Turkey. Another reason for the lira’s depreciation is the suddenly rising perception of political risk. President Erdoğan challenged the US over CAATSA sanctions [in response to Turkey’s purchase of the Russian S-400 missile defense system]. Relations with the EU hit bottom after [Erdoğan’s] call for a boycott of French goods,” Yeşilada said.

Since last year, the US has threatened economic sanctions against Turkey after it concluded a deal with Russia for the S-400 air defense system. Erdoğan confirmed on Friday that the Turkish military had test-fired the missiles, an act that prompted swift condemnation from the US.

On Monday Erdoğan urged Turks to boycott French goods as it projected satirical cartoons of the Prophet Muhammad on government buildings in Paris to protest a recent terrorist attack.

The central bank has sold $120 billion in foreign exchange to the market in the last 10 months to keep the exchange rate low without raising interest rates. Turkey’s dollar reserves have reportedly dropped to minus $38 billion.

During the last one-year period, foreign investors have exited Turkey by selling more than $13 billion in stocks and bonds. Turkey’s foreign exchange reserves were also affected negatively due to the decline in tourism during the pandemic.

Taking into account all these developments and increasing political tensions, there is speculation that the lira could be valued at 10 to the dollar by the end of the year.

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