Following the orders of President Recep Tayyip Erdogan, the Central Bank of the Republic of Turkey has decided to tighten monetary policy for the first time in two years. It appears that the regulator has resorted to any tool at its disposal to boost the national currency. Its last hope is to take a more aggressive stance on monetary policy.
The lira has already hit all-time lows, weakening even against the Russian ruble. It is obvious that the national currency desperately needs support from the central bank. Therefore, the financial authorities are considering raising the interest rate from 8.25% to 10.25% in an attempt to halt the lira's prolonged decline. In the short term, the Turkish currency managed to log several all-time anti-records against the US dollar. Since the beginning of this year, the USD/TRY pair dipped by 23%. Taking into account double-digit inflation, Turkey is facing a real economic threat. Importantly, Recep Erdogan was against raising the key rates. As an alternative, he demanded to sell off foreign currency from reserves, hoping that low rates would revitalize the economy. As a result, the country's foreign exchange assets have almost halved from $74 billion to $45 billion. According to Moody's estimates, $44 billion belongs to the reserves of commercial banks, which means that Turkey has almost dwindled its foreign currency’s reserves.
Notably, Moody's has already downgraded the Turkish government's debt ratings to B2 from B1, putting Turkey on a par with countries such as Rwanda and Uganda. "Turkey’s foreign-currency reserves have been drifting downward for years on both a gross and a net basis but are now at a multi-decade low as a percentage of GDP because of the central bank’s unsuccessful attempts to defend the lira since the beginning of 2020," the agency said. Erdogan was infuriated at such a decision calling it an "economic war" and said that the ratings "don't mean anything". Yet, he is frantically seeking financial assistance but it is quite hard to get a loan with such a low rating.