Turkish Lira Pummels to New Lows After Interest Cut

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by Babafemi Adebajo · 2 min read
Turkish Lira Pummels to New Lows After Interest Cut
Photo: Depositphotos

The Turkish lira continued its drop to unprecedented levels against the dollar on Tuesday. The currency hit an all-time low of 12.49 to the dollar. This amounts to a 20% loss in value since last week alone.

The drop is a reflection of Turkey’s monetary policies. The nosedive began after Turkish President Recep Tayyip Erdogan defended his central bank’s latest policy. With a high inflation rate of nearly 20%, the nation’s apex bank announced further interest rate cuts. The central bank cut rates by 100 basis points to 15%. Despite clear calls by analysts and investors for a change of direction, Erdogan in defense of the policy labeled the move an “economic war of independence”.

Consequently, the lira has now lost about 40% of its value since the beginning of the year. The difference is even more significant when the current value is compared to pre-2018 values when the lira was 3.5 to the dollar.

Turkish Lira Loss of Value Due to Poor Economic Policy

The downward plunge of Turkey’s currency is traceable to multiple causes. Shrinking currency reserves, geopolitical tensions with the West, increasing debt profile have all contributed greatly to the dwindling currency value. While the country may lack the unilateral power to address some of these causes, it has failed to address the one thing it has power over – interest rates. The country has failed to raise interest raises to cater to the double-figure inflation rate.

The Turkish president in particular has blatantly rejected economic orthodoxy, insisting that raising interest rates actually worsen inflation. Investors believe the apex bank to be a pawn in Erdogan’s control. This is evident seeing as Erdogan has fired three bank chiefs in the last two years because of policy differences.

Regarding this, Semih Tumen, a former central bank deputy governor said on his Twitter, “We need to abandon this irrational experiment, which has no chance of success.” Tumen believes there is a need to espouse quality policies that will protect the value of the Turkish lira and protect the welfare of the average Turk.

Bitcoin Adoption Increases

With inflation near 20%,  salaries have become grossly insufficient. This has forced many citizens to turn to Bitcoin as a means of investment, and a way to make some more money. A survey by Turkish crypto exchange Paribu earlier in the year estimated that the crypto users had grown by over 11 times. More users are expected to look towards cryptocurrency if the lira situation continues.

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Babafemi Adebajo

An experienced writer with practical experience in the fintech industry. When not writing, he spends his time reading, researching or teaching.

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