Turkey Gambles Interest Rate Cuts Against Currency Stability
Turkey’s central bank has cut its key interest rate for the eighth time in less than a year.
The 1-percentage point cut was twice as deep as analysts expected and puts the new rate at 8.75 percent.
The cut supports president Recip Erdoğan’s strategy of using cheap money to defend the nation’s economy from damage caused by the virus pandemic and subsequent global economic shutdown.
But the country’s inflation rate is above 11 percent. That means investors holding liras, the national currency, or holding lira-denominated debt, are losing money at a rate of -2.25 percent.
State banks sold liras after the rate cut, weakening the currency’s value.
Analysts warn that as the currency weakens, inflation gains speed.
A weaker lira also squeezes Turkey’s corporations, many of which have dollar-denominated debt, which then requires more lira to service.
Turkey’s foreign currency reserves already have shrunk in recent months as government-owned banks have tried to stabilize and manage currency markets rattled by the lira’s softness.
