Why is the Turkish Lira collapsing and the currency crisis going to worsen? | Business and Economy News

Once again, Turkey is in the throes of a currency crisis. The pound has lost over 40% of its value against the US dollar this year, making it the worst performing of all emerging market currencies.

In November alone, the pound lost more than 25% of its value against the dollar, putting it well in currency crash territory.

Last month’s rapid fall sparked a wave of dollar hoarding and even witnessed the unusual spectacle of people taking to the streets to protest President Recep Tayyip Erdogan’s handling of the economy.

For his part, Erdogan blamed the problems of reading it on foreigners and their supporters in Turkey.

So why is the Turkish lira collapsing? Is it due to Erdogan’s policy? A foreign plot? And is the worst yet to come?

Here is the short answer.

Why did reading it crash?

The lira’s recent problems were triggered after Turkey’s central bank cut interest rates by a percentage point on November 18 – the third cut since September – and announced it would cut rates in December.

What is the relationship between interest rates and the value of a currency?

When a central bank lowers interest rates, money generally becomes cheaper to borrow and therefore less valuable compared to other currencies.

Is this still a bad thing?

Not when inflation is low and you’re trying to kickstart economic growth. Generally speaking, low rates encourage consumers to borrow more to buy things and businesses to borrow more to grow their businesses and hire new workers.

Lower rates also make a country’s exports relatively cheaper and therefore more competitive with products from other countries. All of this tends to encourage economic growth.

OK, so why was the Lira punished when Turkey cut interest rates in November?

Because inflation is anything but low right now. Economies around the world are being stifled by price pressures from supply chain bottlenecks and raw material shortages. Turkey is no exception.

What is the inflation in Turkey?

In October, annual consumer price inflation in Turkey was around 20%. Still, the country’s benchmark interest rate currently stands at 15% after the central bank has cut borrowing costs by four percentage points since September. And when you cut rates when inflation is high, higher inflation will almost surely follow.

Are other emerging economies following Turkey’s lead and lowering their interest rates in response to inflation?

In fact, quite the contrary. South Korea, Russia, Brazil, Mexico and Hungary have all raised interest rates in an attempt to keep inflation under control.

So who is in favor of Turkey raising interest rates to fight inflation?

President Erdogan believes lower rates will fight inflation, boost economic growth, fuel exports and create jobs.

Is the Turkish economy growing?

He is. The Turkish economy grew 7.4% in the third quarter compared to the previous year. Exports were particularly strong.

So does that mean Erdogan is right?

While healthy economic growth suggests that living standards should improve for Turks, unfortunately this is not the case due to soaring inflation.

Turkish businesses that depend on imported goods face higher costs because the British pound holds much less buying punch. And as companies pass these higher input costs on to consumers, Turkish households, especially those with lower incomes, face higher prices for goods, including essentials like food and electricity. energy. And if that wasn’t enough, Turks are also seeing their savings and income eroded by the free fall of the lira.

Are there any other pain points?

The Turkish economy is also very dependent on external financing, which means that companies that have incurred dollar-denominated debt face higher repayment costs as the pound loses value against the greenback.

Will the economy continue to grow, at least?

Some analysts see the Turkish economy actually contracting in the fourth quarter of 2021 due to issues with the lira.

“A sharp contraction is likely in the fourth quarter, as the effects of the pound’s sharp decline in recent weeks – which left it more than 20% lower than in early September – trickle down to the economy,” said Jason Tuvey, Senior Emerging. market economist at Capital Economics, said.

Is it really Erdogan’s fault? After all, it’s the central bank that cuts rates, right?

Central banks set interest rate policy. But Erdogan has sacked three central bank chiefs in the past two years – and has given other central bank officials pink slips.

The last governor to open the door was Naci Agbal, who lost his job in March after just four months in the post. But during his short time at the helm, Agbal oversaw a series of interest rate hikes that helped prop up the Lira.

So, is the lira suffering from the revolving door of the central bank?

Yes. Because when central banks seem to lose their independence, investors get nervous. They fear that political goals will determine a country’s interest rate policy, rather than economic fundamentals.

So what does Erdogan say about the pound crash?

Erdogan says the reader’s problems are the result of the sabotage of the Turkish economy by foreigners as well as their supporters in the country. In a speech on November 22, he declared a “war of economic independence”, which he swore Turkey would win.

How did this speech go?

In the forex markets at least, this triggered a free fall in the pound, which briefly touched what was then an all-time low of $ 13.45 to $ 1. Tuvey of Capital Economics wrote at the time that Erdogan “seems determined to test his unconventional views on monetary policy.”

Are there other factors at play that work against lira?

The lira has been more or less steadily declining since Turkey’s last currency crisis in 2018.

Besides the central bank’s interest rate cuts this year in the face of rising inflation, the pound has also suffered from dwindling foreign exchange reserves and lingering tensions between Ankara and Washington.

Has the worst of this pound crisis passed?

It’s hard to say. With elections slated for next year, Erdogan pledged to continue pushing for lower borrowing costs. So far, he shows no signs of reversing his “unconventional” thinking on interest rates, nor any greater tolerance for central bankers who disagree with his point of view.

Other problems are on the horizon to read it?

As the US Federal Reserve ends its easy money policies, it will likely continue to strengthen the US dollar against other currencies, including the pound.

On Tuesday, the pound hit a new high against the dollar after Federal Reserve Chairman Jerome Powell said the Fed may accelerate the rollback of its bond buying program. These bond purchases helped keep long-term interest rates low during the coronavirus pandemic. Powell said the Fed could speed up the end of the program because “the economy is very strong and inflationary pressures are very high.”

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