The Central Bank cut rates from 16% to 15% last Thursday, well below year-on-year inflation, which is close to 20%. This policy has led to a devaluation of the lira that triggers consumer prices, because even Turkish local products depend on the foreign exchange market, due to the fact that the country imports many raw materials, in addition to fuel and energy.
The price of the Turkish lira began to decline in mid-October as Turkish President Recep Tayyip Erdogan dismissed three senior central bank officials, including two deputy directors, by decree.. The three fired officials voted against the interest rate cut at a banking meeting in September. Erdogan, for his part, advocates the decline, arguing that inflation is driven by high interest rates.
Erdogan’s insistence on cutting rates and his frequent revisions by central bank management, partly due to political disagreements, appear to have seriously damaged the bank’s credibility over the years, hitting the lira.
The Turkish currency has already lost 35% of its value so far this year, with a very steep decline since mid-October, which has accelerated in recent months. Only since Monday of last week has accumulated a depreciation of 17% against the euro and the dollar.
“The risks are tilted towards further depreciation,” added Guillaume Tresca, emerging markets strategist at Generali Insurance Asset Management, adding that he expects the turmoil in Turkey to have limited impact on other countries and assets in emerging markets.
Inflation in Turkey is approaching 20%, which means that basic goods for Turks – a population of about 85 million people – have skyrocketed in price and their wages in local currency are severely undervalued. The lira lost almost 40% of its value this year and 20% only since the beginning of last week, according to Reuters.