Erdogan's Monetary Policy 'Backtracking' Leads Turkish Lira to Record Low

Lira Falls Up to 18% in a Single Day

President Recep Tayyip Erdogan of Turkey
[Image source=Reuters Yonhap News]

[Asia Economy Reporter Kim Suhwan] Amid persistently high inflation in Turkey, President Recep Tayyip Erdogan continues to pressure for interest rate cuts. Due to Erdogan's policy, which 'runs counter' to the rule that interest rates should be raised when inflation rises, the Turkish lira's value plunged by up to 18% in a single day, hitting an all-time low.

On the 23rd (local time), the Wall Street Journal (WSJ) reported that the Turkish lira's value against the US dollar fell by as much as 18% in one day.

This is the largest drop since the dismissal of the Turkish central bank governor in March. Considering that currency values typically fluctuate less than 1 percentage point per day, the lira's volatility is interpreted as extremely severe.

The lira's plunge came immediately after President Erdogan hinted at the possibility of further interest rate cuts.

In a press conference the previous day, President Erdogan said that interest rate policies cannot control inflation and would rather shrink the economy. He emphasized, "Instead of the vicious cycle of high interest rates and low exchange rates, we will do the right thing for Turkey with economic policies focused on investment, production, employment, and exports."

He referred to raising interest rates to combat inflation as a traditional monetary policy and rejected it, stating, "Turkey will succeed in its economic independence war."

Generally, when a central bank lowers the benchmark interest rate, the money supply increases, causing prices to rise and the domestic currency to depreciate against foreign currencies. This is why Erdogan's remarks are criticized for running counter to conventional monetary policy.

With further interest rate cuts expected, there are concerns that Turkey's current annual inflation rate of 20% will rise even more. Experts analyzed, as reported by WSJ, that the decline in the lira's value and the surge in exchange rates have made it more difficult for companies to repay overseas bonds, and prices of imported goods such as oil will also soar.

Uday Patnaik, an emerging market debt analyst at investment advisory firm Legal & General, warned, "Turkey is playing a dangerous game," adding, "If people lose confidence in the lira, a bank run (massive withdrawal of deposits) could occur."

This content was produced with the assistance of AI translation services.