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Turkey: Lira falls again to record low after a sharp cut in interest rates


The unexpectedly sharp cut in interest rates in Turkey continues to have a strong impact on the local currency. One observer speaks of a "prime example of lost confidence in the financial markets."

Enlarge image

Exchange office on Saturday in Istanbul


Diego Cupolo / imago images / NurPhoto

The rate cut in Turkey on Thursday was radical.

One day later, the fall of the national currency continued at a rapid pace.

Record lows were reached in trading with the dollar and the euro.

For a dollar, 9.66 lira had to be paid for one dollar and 11.25 lira for one euro, which is more than ever before.

With its interest rate cut, the central bank apparently gave in to pressure from President Recep Tayyip Erdoğan.

Since it became known on Thursday that the Turkish central bank had lowered the key interest rate by 2.0 percentage points to 16.0 percent despite high inflation, the lira has lost around 3.5 percent of its value in trading with the euro.

Since the beginning of the year, the loss in value in trading with the European common currency has now amounted to around 25 percent.

"The fall of the Turkish lira is a prime example of the loss of confidence in the financial markets," said Thomas Gitzel, VP Bank's chief economist, about the latest monetary policy decisions in Ankara.

Instead of countering the devaluations and the high inflation rate of almost 20 percent with interest rate increases, the central bankers have loosened the reins of monetary policy.

Gitzel: "Confidence-building measures look different."

Four central bank governors since 2019

Russia, on the other hand, is taking a different path: the inflation rate has also risen recently, although at 7.4 percent it is nowhere near as high as the inflation rate in Turkey.

The Russian monetary authorities reacted on Friday lunchtime with an unexpectedly strong increase in the key interest rate, thereby boosting the ruble's exchange rate in trading with the euro and the dollar.

With regard to Turkey, too, economists agree that in the current situation, interest rate increases are more advisable: Investments in Turkish assets are now even less attractive for investors, the currency is becoming even weaker - and it is also fueling inflation because imported goods are becoming more expensive.

Meanwhile, President Erdoğan recently fired three central bankers whose monetary policy he did not agree with.

The current central bank chief Sahap Kavcioglu has only been in office since March after his predecessor Naci Agbal was dismissed for raising interest rates.

Kavcioglu is now the fourth central bank governor since 2019. All of his predecessors were ultimately out of favor because they did not support Erdogan's preferred course of loose monetary policy.

apr / dpa

Source: spiegel

All business articles on 2021-10-22

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