Lira plunges as Turkey cuts interest rate again

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The Turkish lira on Thursday hit fresh lows after the central bank fired the latest salvo in President Recep Tayyip Erdoğan’s “economic war of independence” by cutting interest rates for the fourth successive month, Agence France-Presse reported.

The reduction of the main rate to 14 from 15 percent comes in face of an annual inflation rate that has surged past 20 percent and is expected to climb even higher in the coming weeks.

The lira was trading down nearly four percent immediately after the announcement.

“The accompanying statement suggests that the easing cycle will be on pause early next year but, even so, the lira will remain under pressure and capital controls are likely,” the Capital Economics consultancy said in a research note.

The Turkish currency has shed more than half its value since the start of the year — and 30 percent in the last month alone — as policymakers bow to Erdoğan’s wishes to bring down borrowing costs despite soaring inflation.

A dollar could buy three liras in 2016 and 7.43 liras on January 1. It was worth 15.35 liras on Thursday after opening the week at around the 13.80 mark.

Analysts and diplomats believe Erdoğan unleashed his pro-growth policy in a bid to revive sagging approval numbers ahead of a general election due within the next 18 months.

The Turkish leader is trying to fight spiraling inflation by bringing down borrowing costs — the exact opposite of what countries usually do in similar situations.

Central banks around the world are currently raising or preparing to raise rates to combat consumer price jumps caused by factors related to the coronavirus pandemic.

The Turkish central bank blamed consumer price increases on “developments in exchange rates and supply side factors such as the rise in global food and agricultural commodity prices, supply constraints, and demand developments.”

It said it would reassess “all aspects of the policy framework” over the first three month of 2022.

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