Topline
The Turkish lira collapsed to a record low value Tuesday after President Recep Tayyip Erdogan doubled down on his unorthodox plan to fight rising prices with lower interest rates—fueling concerns that the government's seeming disregard for runaway inflation could intensify Turkey's years-long currency troubles.
Key Facts
The lira fell 9% Tuesday to as low as $0.08, or 13.45 to the U.S. dollar, pushing losses to more than 19% over the past week and 23% over the past month.
Erdogan sparked the historic one-day plunge on Tuesday after a speech in which he defended the Turkish central bank's recent interest rate cuts and vowed to win an "economic war of independence."
In a recent note, JPMorgan analysts blamed the lira's exponential decline on the Turkish central bank's three consecutive interest rate cuts, which Erdogan has welcomed in a bid to boost exports, investments and jobs—not unlike the reasoning behind U.S. Federal Reserve policy that's kept interest rates at near-zero levels during the pandemic and most of the past decade.
However, the aggressive strategy in Turkey has flown in the face of traditional monetary policy utilizing higher interest rates to curb rising prices: The nation's inflation rate soared to nearly 20% in October—three times the decades-high inflation that's sparked widespread economic concerns in the U.S.
Though higher rates are used to curb inflation, Erdogan has long expressed contempt for interest rates, which have fallen from 20% to 15% after the recent rate cuts, and has even called them the "mother and father of all evil" because they stave off economic growth.
In a statement Thursday morning, the Central Bank of the Republic of Turkey said it had no commitment to exchange rates and blasted the lira's plunging value as “unrealistic and completely detached from economic fundamentals," saying it would only intervene in the event of “excessive volatility.”
Key Background
Plagued by years of unorthodox monetary policy, Turkey's ailing lira has erased nearly 70% of its value, relative to the dollar, over the last five years. The troubles at first culminated with a steep depression in 2018, when shares of the nation's financial institutions plunged by nearly half as the falling lira deteriorated corporate earnings. Though the lira's value remained fairly steady for years thereafter, it's once again fallen in turmoil amid Erdogan's efforts to lower interest rates this year. Erodgan went as far as abruptly firing three senior central bank officials last month because they raised rates to help control inflation. Now faced with lower interest rates, the lira has plunged another 40% this year, making it the worst-performing currency in the world.
Chief Critic
"This irrational experiment, which has no chance of success, must be abandoned immediately," Semid Tumen, a former Turkish central bank official whom Erdogan dismissed last month, said Tuesday on Twitter. "We must return to quality policies which protect the Turkish lira's value and the prosperity of the Turkish people."
What To Watch For
In a note to clients Tuesday, Goldman Sachs analysts said the lira's freefall will likely force central bank officials to hike interest rates to 20% in the second quarter of next year. Citi on Tuesday said the lira's plunging value makes it more likely the central bank will act on interest rates sooner, which should in turn quell the crash.
Further Reading
What Will Biden Do About Turkey's President Erdogan? (Forbes)
