President Recep Tayyip Erdogan’s renewed calls for lower interest rates has sent Turkey’s lira to new all-time lows. He even spoke to the central bank’s new governor about it. Erdogan reiterated his position that the central bank must lower interest rates. He noted that lower interest would lift the burden on investments. Erdogan’s remarks were part of a longer explanation of his unorthodox belief that lower borrowing costs will help slow inflation. Lower interest rates will lower producers’ costs and eventually result in slower increases in customer prices.
His frequent calls for lower borrowing costs as well as Erdogan’s abrupt removal of three central bank chiefs eroded the country’s monetary credibility. His actions left the lira more vulnerable to high inflation and financial crisis.
Lira was at 8.63 against the U.S. dollar at 05:27 GMT on Wednesday. It has lost 16% since mid-March when Erdogan removed a well-respected central bank chief. He appointed a like-minded critic of tight policy. In less than two years he removed three central bank chiefs.
Sahap Kavcioglu who is the current governor of the central bank kept the policy steady at 19% since mid-March. Nonetheless, analysts expect a cut in the third quarter. Inflation rose above 17% and the currency depreciation adds price pressure via Turkey’s heavy imports.
Central bank leaders are set to hold calls with investors later on June 2, to discuss policy as well as economic prospects.
Turkey relies on foreign currency income from tourism to reduce its current account deficit. However, the country risks another lost season as several countries imposed restrictions on travel due to the high number of Covi-19 cases.
Lira and other currencies
It is not a good day for the lira, as it dropped to record lows, but another currency reached better results. The U.S. dollar edged higher in early European trade on Wednesday and climbed from a near five-month low.
The dollar index was up 01.% at 89.935, after falling as low as 89.662 on Tuesday, approaching the lowest since January 7 at 89.533.
EUR/USD was largely flat at 1.2216, not far from a new five-month high of 1.2266 touched last week. USD/CAD was also largely flat at 1.2067 after declining to a fresh six-year low of 1.2007 on Tuesday.
Elsewhere, USD/CNY rose 0.1% to 6.3829, climbing from the three-year low of 6.3526 reached on Monday.
AUD/USD was down 0.1% at 0.7748 after the country’s economy expanded faster than forecast in the first quarter. Australia’s gross domestic product advanced 1.8% from the final quarter of 2020.
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