President Erdogan is pushing for interest rate cuts, and it has dragged the Turkish lira towards 8.7 levels, as inflation remains at double digits.
Rate Cut Expectations Push Turkish Lira to 8.7 levels
The Turkish lira dropped almost 14% in 2021 against the dollar, the highest drop in major currencies in 2021. The dollar to Turkish lira was at 8.8 in mid-June, the highest in many years.
The interest rate cut pushes the Turkish lira lower again. The lira was a laggard currency in 2020 and 2021. Now, investors fear that another interest rate cut may weaken the lira further.
Turkish President Recep Tayyip Erdogan, well known for his drive for lower interest rates, pulls the lira down with his policy of low rates. Erdogan said that he spoke to Kavcioglu to cut interest rates within two months. The lira tumbled to low levels against the dollar on his statement.
Tension prevails between the US economy and Turkey on the purchase of the missile defence system from Russia.
Central Bank Governors Lose Jobs for Hiking Rates
President Erdogan demands lower interest rates again. He says it is “imperative” to have lower rates while speaking in an interview. The rates may go down in July or August, says the President. Investors expect rate cuts in the third quarter.
Central bank governors lost their jobs when they tried to lower rates. But the current governor Sahap Kavcioglu says that fear of interest cuts are unjust. Kavcioglu is willing to cut rates to please the President, say experts.
When President Erdogan ousted a market-friend central bank governor Naci Agbal in March, the Turkish lira lost almost 17% on this news. The USD to lira slid to 7.1900 in mid-March when Agbal lost his job as central bank governor.
Three governors lost their jobs when they tried to hike interest rates. Interest rate hikes will curb inflation and help in economic growth. The shuffling of three central governors in two years has caused foreign investors to question the stability of the Turkish currency. They have dumped their investment in the lira, as they have lost confidence in the Turkish currency and the economy. Investors are shedding their currency portfolios to safeguard their investment. In April, the lira fell sharply when Governor Agbal quit.
Markets are waiting for the pre-mature lowering of interest rates by the President. Policy easing will lead the country to a financial crisis. But President Erdogan is against policy easing, saying that it will lead to inflation, while experts say that low rates will cause inflation.
Inflation at 17% in Turkey
Inflation is high, but the President prefers to have rates at a lower level. Inflation is at double-digit rates, and people fear that the central bank governor may not know how to control the spiraling inflation.
Inflation is currently at 17%. The weakness in the lira has raised import costs. The rising import price is another cause for high inflation within the country. Though exports are cheaper, the costs of commodities are increasing, and consumers have less to spend. It will bring down consumer confidence, say experts. In May, the inflation rate fell to 16.59% after moving to a two-year high. Consumer prices increased to 0.89%.
Kavcioglu says that inflation will come down in September or October. The lira has weakened, and it has raised inflation higher.
Lockdown in May
The lockdown in May helped to curb prices and helped to bring down inflation in May. Clothing prices were the lowest in May. Transport costs have gone up.
The producer price index moved higher in May to 3.92%. It will impact consumer prices and inflation in the coming months, say experts.
The coronavirus pandemic has hit the tourism sector. Revenue from tourists visiting the country has come down, leading to current account deficits. Strict curbs caused more job losses in the country already ravaged by political crises and high inflation levels. High inflation and increased costs are leading the country towards unemployment and poverty. Debts are increasing with high prices as people are unable to repay loans.
Though the lockdown helped curb the coronavirus cases, it has caused havoc in the economic activities of countries with business closures and high debt.
Strong US Dollar Drag the Turkish Lira Lower
The US hawkish tone has pulled up the US dollar value. The dollar value has increased, and it has caused the Turkish lira to decline. A policy hike can be expected soon, say experts. The US economy has expanded with the big stimulus pack received. The Fed will hike interest rates when inflation comes down. The fed states that inflation is transitory and may come down soon.
The greenback has gone up along with the US Treasury yields on good payrolls data.
The meeting between US president Joe Biden and President Erdogan did not bring any breakthrough in talks. Key disputes were unresolved.
The USD has moved higher to 92.15 on Tuesday, June 29. The US dollar index is dragging the Turkish lira lower.