President of Turkey Recep Tayyip Erdogan continues to keep under total control all the functions of the country’s central bank. However, such management severely damaged the lira and Turkish economy.
Erdogan’s decision has made the lira to reach rock bottom. The Turkish national currency slumped to an all-time low right after the president ordered the regulator to cut the interest rate despite a sharp increase in inflation. When the local central bank announced a decrease in its interest rate by 200 basis points to 16%, the lira dropped to 9.72 against the US dollar or by 3.5%. President Erdogan was carefully setting the stage for the upcoming regulator’s meeting by sacking three central bank governors, who were against the president’s decision to reduce the cost of borrowing. No objections have been raised since then.
Currently, the central bank’s key rate is 4% lower than the inflation rate, which accelerated to 20% in September, exceeding the target level by four times. This year the lira has depreciated by 27%. Since the beginning of the pandemic, TRY has decreased by 60% and by more than five times in the last 10 years. Piotr Matys, senior FX analyst at InTouch Capital Markets, commented on the issue: “It is a clear signal from the market that the central bank could be making a policy mistake at a time when headline inflation is so high." He added that the pressure put on the forex rates would worsen market expectations and exacerbate the considerable inflationary pressure.
