Turkish lira's crash shows the value of central bank confidence
The value of the Turkish lira against the dollar fell more than 2% immediately following the central bank's decision not to adjust its benchmark one-week repo rate, sending the currency plummeting to its lowest level on record.
Why it matters: Turkey is becoming a cautionary tale of what can happen when a central bank loses its independence and credibility and is effectively controlled by the president.
The backdrop: President Recep Tayyip Erdogan has needled the central bank to keep interest rates low to boost the economy despite wide-ranging inflation and has largely gotten his way after firing former governor Murat Cetinkaya.
Reality check: Had the central bank raised rates it would have sent "a credible signal" to investors that the central bank was "addressing the deterioration in inflation expectations and continuing with the gradual shift back towards more conventional monetary policy," Phoenix Kalen, an emerging markets strategist at Société Générale, told the Financial Times.
- "But clearly we did not see that."