Turkey’s lira plunged to a new low as investors braced themselves for the country’s central bank to cut interest rates again on Thursday even as inflation has taken hold across the economy.
The currency, which has lost more than 40 per cent of its value against the dollar since the bank started cutting rates under the orders of President Recep Tayyip Erdogan in September, hit TL15.2 to the US dollar in early London trading.
Erdogan, a staunch opponent of high interest rates, has insisted the central bank repeatedly cut rates even as inflation has soared to an official rate of more than 21 per cent and the Turkish lira has gone into freefall. He has sought to argue that a cheap currency will eventually lead to price stability by boosting exports, investment and employment.
The central bank was on Thursday forecast to reduce interest rates by 1 percentage point to 14 per cent, according to a Reuters poll. The one-week repo rate had been set as high as 19 per cent up until September, when governor Sahap Kavcıoglu began the aggressive cutting cycle. At the beginning of September, the lira traded at about 8 to the dollar.
Economists say the rate reductions at a time of such acute inflation are an unprecedented economic experiment that is likely to result in runaway inflation, further eroding the living standards of a population that is already suffering from rising poverty.
“If it were not for the pain and suffering inflicted on 84 million people, this would be a fascinating economics experiment,” said Refet Gurkaynak, a professor of economics at Ankara’s Bilkent University.
“It shows that economists actually have a very good understanding of the fundamentals of monetary policy. We knew this would be the result — and it is.”
Erdogan, whose ruling party has suffered an erosion of support in the polls amid the economic turbulence, is expected to announce a huge increase in the minimum wage on Thursday in a bid to offset the impact of the sliding currency on the public. Pro-government media reported that the increase was expected to be about 35 to 40 per cent.
The Turkish president, who earlier this month appointed a new finance minister after the resignation of his former economy chief, announced a further shake-up in the economic team early on Thursday.
He removed Sakir Ercan Gul and Mehmet Hamdi Yildirim, two deputy finance ministers, according to a decree published in the official gazette.
He replaced them with Yunus Elitas, a bureaucrat, and Mahmut Gurcan. Gurcan is a former ruling party official who, like the family of Nureddin Nebati, the new finance minister, also has a textiles business.