Central Bank of Turkey cuts interest rates again – Pound losses widen

The Turkish pound plunged to a new low after the Central Bank (TCMB) decided to cut interest rates again, by 100 basis points, to 14%, at the behest of President Recep Tayyip Erdogan.

The pound has lost more than 2.5% since the morning, passing the 15 to the dollar, losses that accelerated after the decision of central banker Sahab Kavtzioglou. It is now trading at 15.5 against the dollar, with losses of more than 5%.

The text published by the Monetary Policy Committee states that: “Exchange rate developments, increases in world food and agricultural commodity prices, supply-side factors such as supply disruptions and demand developments have an impact to the rise in inflation observed in November “, noting that the indicators will be closely monitored in the first months of 2022.

“TCMB will continue to use all the tools at its disposal with determination until strong indicators emerge that indicate a permanent decline in inflation and the medium-term target of 5% is achieved, according to the main objective of price stability. “It will have a positive effect on macroeconomic stability and financial stability through the reduction of country risk premiums, the continued reversal of the currency and the upward trend of foreign exchange reserves and the permanent reduction of financing costs,” the statement said. of the decision “.

The bank cut interest rates by 400 points to 15% this year, causing the pound to lose more than 51% of its value against the dollar. The currency is by far the emerging market (EM) currency with the worst performance in 2021.

Erdogan’s repeated changes to central bank members, along with the resignation of Finance Minister Lutfi Elvan this month, have hurt investor confidence in Turkey’s foreign exchange and debt markets, according to Reuters. This did not stop Erdogan, who fired a few hours ago two deputy finance ministers.

“Erdogan has installed his students [σ.σ. ανθρώπους που ασπάζονται την οικονομική του θεωρία περί χαμηλών επιτοκίων] “both the Central Bank and the Ministry of Finance and is determined to impose steady cuts in interest rates and avoid a recession in the run-up to the 2023 elections,” TS Lombard analysts wrote in a note.

The declining purchasing power of the Turks could eventually lead to a slowdown in the economy or even a recession, economists say.

“The market has gone beyond giving signals. It is literally shouting at the government not to continue,” said Selim Sazak, a researcher at Bilkent University in Ankara who advises a Turkish opposition party.

The weakening of the pound triggers inflation, increasing the cost of importing essential goods such as medicines, certain foodstuffs and gas, expressed in dollars and euros.

Official data for November showed that inflation in Turkey reached 21.3% compared to a year ago, although analysts estimate that it is probably higher.

The same time, Turkish president prepares raises to “gild the pill” to Turks, as the minimum wage in Turkey now stands at $ 186.

Just Monday, Turkey’s central bank intervened in the market, selling foreign currency stocks and buying pounds, in a bid to bolster its currency over what it saw as “unhealthy exchange rate hikes”. The intervention has preoccupied investors, who believe that the central bank of Turkey has more foreign currency liabilities than assets, giving it little firepower to stabilize the pound. According to the Wall Street Journal, Haluk Burumceci, an Istanbul-based economist, estimates that the central bank’s foreign exchange position has fallen by $ 5.5 billion this month, during which it worked to stabilize the pound.

Turkish companies and banks have significant foreign currency debts, which become more difficult to repay as the pound plummets. S&P Global Ratings changed its outlook for Turkey from negative to stable last week. The rating agency noted that recent interest rate cuts and the devaluation of the pound are likely to further stimulate inflation.

Petros Kranias

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