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For the second consecutive month, Turkey’s central bank has paused its practice of cutting interest rates in the face of mounting inflation, which was running at 48.7 percent in January, according to official figures that we reported in “Turkey’s Inflation Rate Nears 50 Percent” (8 Feb 2022).
Analysts had expected the bank to leave the rate untouched, World Watch reported.
The Central Bank of Turkey cited “increased geopolitical risks” due to Russia’s military buildup surrounding Ukraine as its reason for standing pat. Turkey and Russia share the Black Sea.
The bank cut interest rates four times in a row last year as inflation more than doubled its pace.
The cuts drove billions of dollars in foreign investment out of the country and sent the lira, Turkey’s currency, into a tailspin, plunging by as much as 45 percent against the dollar.
We documented Turkey’s long financial slide in:
- “Turkey’s Central Bank Governor Fired After Rate Hike” (23 Mar 2021)
- “Turkey: Interest Rates Down, Lira Crashing. War Next?” (19 Oct 2021)
- “Turkey’s Economy Continues to Implode” (14 Dec 2021)
…among other articles.
Last spring, Turkey’s president Recep Erdogan fired Naci Agbal, the central bank’s governor, after the bank raised interest rates in an attempt to quell inflation and give a positive return to investments denominated in lira, Turkey’s currency.
Erdogan fired Agbal for contradicting his insistence that low interest rates tame inflation, a notion contradicted by basic economic theory and his own experience, which we reported in “Turkey’s Financial Markets Crash After Agbal Firing” (30 Mar 2021).
Agbal raised the central bank’s key rate, once in November 2020 and again in March 2021, by a total of 8.75 percentage points.
The hikes brought the rate to 19 percent at a time when Turkey’s official inflation rate had reached 15 percent. During the period, the lira regained 18 percent of its value.
Erdogan replaced Agbal with Sahap Kavcioglu, an ally who since has continued to cut interest rates as Erdogan wishes, despite inflation climbing relentlessly at its fastest clip in 20 years.
In late May, Erdogan swapped out Oguzhan Ozbas, one of the central bank’s deputy governors, for Semih Tumen, an economics professor and key Erdogan advisor, helping the president cement his control over monetary policy (“Turkey: Another Day, Another Central Bankster Fired,” 1 Jun 2021).
On Ozbas’s firing, the lira sank to another low for the year against the dollar.
“Independence at the Turkish central bank is non-existent,” economist Jason Tuvey at Capital Economics said at the time.
The central bank has been trying to save the lira by cashing in the country’s foreign currency exchange to buy its own.
Turkey’s central bank also has asked exporters earning foreign currency to sell 25 percent of their hard-currency revenues to the bank in exchange for lira.
At the same time, the government has made a promise to reimburse savings accounts for any loss they incur through inflation, as we noted in “Turkey’s Bonds Downgraded. Worse to Come” (15 Feb 2022).
The moves have slowed the lira’s decline but not reversed it.
On 12 February, ratings agency Fitch lowered Turkey’s sovereign bond ratings deeper into junk status, dropping them from BB- to B+, putting the G20 nation on the same credit footing as Benin and Rwanda (“Turkey’s Bonds Downgraded. Worse to Come,” 15 Feb 2022).
Erdogan’s mismanagement of the economy has driven his popularity close to the lowest of his 20-year reign. The country will hold presidential elections in June 2023.
TREND FORECAST: Our outlook for Turkey remains unchanged.
As we have been reporting for a year, the country’s crashing currency and soaring inflation continue to roil an increasingly chaotic and unstable socioeconomic and geopolitical environment in the country. Foreign investors are pulling their cash out before Turkey’s economy crumbles completely.
As the global economic recovery decelerates—and as inflation keeps rising across the globe—the lira and Turkey’s economy will continue to decline.
Another virulent COVID outbreak would make Turkey’s plight even worse: nearly 13 percent of its GDP rests on travel and tourism.
Erdogan’s domestic popularity recently fell to a two-year low and will continue to sink with citizens’ economic prospects, especially if his current economic “rescue” schemes fail to reverse the economy’s tailspin.
For that reason, look for Erdogan to become more belligerent in his comments and actions directed at foreign “enemies.” As Gerald Celente often says, “When all else fails, they take you to war.”