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Once again, Turkey’s central bank has cut interest rates, sending its currency to a new low against the dollar and heightening fears that inflation will worsen and crash the country’s economy.
The bank cut its one-week repo rate by 1 percentage point to 15 percent, the third cut since economist Sahap Kavcioglu became the bank’s governor in September, when the rate was 19 percent.
On 17 November, the lira’s value lost another 2.7 percent against the dollar, its value shrinking for a seventh consecutive day and losing 10 percent over 10 days.
The series of rate cuts has driven the Turkish lira down 30 percent this year, making it the world’s worst-performing emerging-market currency in 2021 and teeing it up to lose value for a ninth year in a row.
We have reported on Turkey’s steadily deteriorating economy in articles such as “Turkey’s Financial Markets Crash After Agbal Firing” (30 Mar 2021) and “Turkey: Another Day, Another Central Bankster Fired” (1 Jun 2021).
The lira’s tailspin awakens memories of the currency’s 2018 crash, when it lost a third of its value amid soaring inflation and an increasing rate of loans defaulting.
The rate cuts will further fan current inflation, already galloping at an official annual rate of 20 percent, but which independent economists claim is likely twice that pace, as we reported in “Turkey: A Crime to Tell the Economic Truth? (5 Oct 2021)
Kavcioglu is a political ally of Turkish president Recep Erdogan, who continues to insist that low interest will not only revive the country’s failing economy but also will lower the pace of price increases.
However, lower interest rates and a weakened currency worsen inflation by raising the price of imports, causing the vicious cycle Turkey is experiencing.
In contrast, higher interest rates make borrowing more expensive, tamping down spending and demand, which reduces prices.
Higher rates of interest also attract investment capital into an economy.
Erdogan once again vowed to relieve Turkey from the “scourge of high interest rates.
“As long as I’m in office, I will continue our struggle against high interest rates until the very end,” Erdogan said in a 17 November speech, citing a passage in the Koran that, he said, counsels against charging interest.
Erdogan has fired three central bank governors in the past year, as well as various other bank officials (“Turkey: Lira Down, Interest Rates Crashing. War Next?” 19 Oct 2021).
Erdogan holds to a belief that lower interest rates will not only goose his country’s feeble economy but also will lower inflation, a notion unsupported by economic theory or his own experience. Erdogan called interest rates “the devil.”
Today, the Turkish lira dove to a record low of 13.44 to the dollar, which was much worse than what was deemed the “psychological” barrier of 11 to the dollar which it hit last week.
TREND FORECAST: As we noted in “Turkey: Lira Down, Interest Rates Crashing. War Next?” (19 Oct 2021), the country’s crashing currency and soaring inflation continue to roil an increasingly chaotic and unstable Turkish socioeconomic and geopolitical environment. 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. Ongoing COVID outbreaks will worsen Turkey’s plight; 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.
For that reason, look for Erdogan to become more belligerent in his comments and actions directed at foreign “enemies.” Remember, as Gerald Celente has noted, “When all else fails, they take you to war.”
TREND FORECAST: As we noted in “Turkey: No Political Opposition Permitted” (23 Mar 2021), the country’s crashing currency and soaring inflation are adding fuel to an increasingly chaotic and unstable Turkish socioeconomic and geopolitical environment.
As the global economic recovery decelerates—and as inflation keeps rising across the globe—the lira and Turkey’s economy will continue to decline. Ongoing fears of the spreading coronavirus will worsen Turkey’s plight; nearly 13 percent of its GDP rests on travel and tourism.