Dec 17, 2021 - Economy

Turkey's currency tumbles after latest rate cut

Lira per U.S. dollar
Data: FactSet; Chart: Axios Visuals

Turkish President Recep Tayyip Erdoğan is plowing forward with a plan to prove economists wrong.

Driving the news: Turkey’s central bank, under pressure from Erdoğan, on Thursday slashed interest rates for the fourth time in as many months, despite official inflation figures running at over 21%.

Why it matters: Erdoğan is doubling — or quadrupling — down on policies that are roiling its financial markets and hurting ordinary Turkish citizens.

  • In response to the rate cut, the Turkish lira has fallen another 12% relative to the dollar, bringing its plunge to about 50% since rate cuts began in September.

The impact: Street vendors have taken to selling half bagels. And Turkish residents are converting their savings into foreign currencies and gold, as Menekse Tokyay reported for Axios from Ankara.

The backstory: Erdoğan believes that cutting rates will help tame inflation, the opposite of economic orthodoxy. His thinking is that a lower lira will make its exports more attractive — stimulating jobs. The flip side of that, of course, is that imports to Turkey are more expensive.

  • Acknowledging the hardship on Turkey's working class, Erdoğan on Thursday announced he's raising Turkey's minimum wage by an eye-popping 50% — a move that could also stoke further inflation, Bloomberg reports.

What to watch: "We think that the lira will remain under pressure and that this could lead to the introduction of capital controls," wrote Capital Economics analysts in a research note.

The bottom line: “If it were not for the pain and suffering inflicted on 84 million people, this would be a fascinating economics experiment," Refet Gürkaynak, a professor of economics at Bilkent University in Ankara, tells the FT.

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