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Turkish lira's fall still fuels inflation chapter


Written by Frédéric Dubessy on Friday, December 17th 2021 à 15:25 | Read 148 times



The Turkish lira continues to lose ground against the dollar (photo: TCMB)
The Turkish lira continues to lose ground against the dollar (photo: TCMB)
TURKEY. The drop in interest rates from 15% to 14% has caused the Turkish lira to fall by 6% on Thursday 16 December 2021 alone. This year, the currency has lost 52% of its value against the dollar and about 30% in one month. This is the worst performance for an emerging currency.

Turkey is the only G20 country, along with China, not to have been in recession in 2020 (GDP at +1.8%) thanks to the near doubling of credit granted by public banks due to low interest rates. It is paying for this with the fall in its currency, and therefore increasingly expensive imports and higher prices for consumers.

This is the result of Recep Tayyip Erdogan's policy. The Turkish president remains on a strict, and highly questionable, line on the economy. He prefers to act by reducing interest rates, thus offering cheap credit and thus promoting investment and growth. Without worrying in the least about the immediate consequences of this strategy: the relentless rise in inflation (20% in one year) in a country that is highly dependent on imports and the loss of purchasing power of its population. So much so that on Thursday 16 December 2021, the president announced a 50.4% increase in the minimum wage. From January 2022, it will rise from £2,825 (€150.2) to £4,250 (€226). This applies to a single worker without children. "The amount of the new minimum wage will increase if the employee is married and according to the number of children," he said. He added, "the revaluation of the minimum wage is a demonstration of our will not to crush workers under the effects of inflation. The government also plans to abolish income tax on the minimum wage.

A succession of resignations and dismissals

Recep Tayyip Erdogan does not back down from his policy, despite the warning signs that have been sent out for years.
At the end of August 2018, after Moody's published successive downgrades of twenty local financial institutions, including two financial companies and eighteen banks, and then the downgrading of fourteen banks by S&P, Erkan Kilimci, deputy governor of the Turkish Central Bank (Türkiye Cumhuriyet Merkez Bankasi - TCMB) preferred to resign rather than endorse this strategy.
In July 2019, the Turkish president dismissed Murat Cetinkaya, the TCMB governor in office since April 2016, who refused his policy of lowering interest rates.

In early November 2020, Murat Uysal, his successor, was dismissed for the same reasons. The very next day, Berat Albayrak, Minister of the Treasury and Finance since July 2018, resigned in the face of the stubbornness of the man who is also his father-in-law. The son-in-law of Recep Tayyip Erdogan was nevertheless armed with good intentions. "In the coming period, we will work intensively to bring inflation down to single digits," he said when he took office. He was soon disillusioned. Even more so when his president decided to appoint the governor of the Turkish Central Bank and his team himself. To the great displeasure of Christine Lagarde. At the time director of the International Monetary Fund (IMF), she warned already in May 2018, against the backdrop of rumours of the president's influence on the TCMB: "when it comes to monetary policy, it is always desirable for political leaders to let central bank governors do their job and guarantee their independence."  The advice was not followed...
Murat Uysal's replacement, Naci Agbal, a former finance minister, lasted only a few months before he too was dismissed in March 2021. His "fault" was to have raised the main central bank rate by 200 basis points against the advice of the president. This time there was no more pretense, and Şahap Kavcıoğlu, a former AKP (ruling party) MP who was nevertheless an economist by trade, took his place. From the outset, he stated that he wanted to follow the guideline set by the government and his credo, "lower inflation will positively affect macroeconomic stability through risk reduction and a permanent improvement in financing costs", he insisted. This is the gamble of Recep Tayyip Erdogan, who is banking on this equation to show growth in the upcoming presidential elections scheduled for 2023.

Drop of 500 basis points in three months

At the beginning of December 2021, Lütfi Elvan, Minister of Finance, also lost his post, which he had held for only thirteen months. He was replaced by his deputy Nureddin Nebati. In the cart were also two officials of the Central Bank. All of them were wrong to try to explain to Recep Tayyip Erdogan that he was wrong in his analysis. On Thursday 17 December 2021, the head of state silenced the criticism of two deputy finance ministers again by removing them from their posts.

This Thursday, 16 December 2021, Şahap Kavcıoğlu, the third thus to occupy the ejection seat of TCMB governor in two years, wisely followed the president's recommendations by thus proceeding to cut interest rates by one hundred basis points.
The monetary policy board justified this decision by "limited supply in some sectors and rising logistical costs which are leading to higher producer and consumer prices". The central bank said it would continue to take the necessary measures to achieve the medium-term inflation target of 5%.

The move from 15% to 14% led to a further fall in the pound to 15.65 to the dollar, closing at 15.66 on Thursday 16 December 2021. By the end of the morning on Friday 17 December 2021, the ratio was 16.82 pounds to the dollar, a gain of 7.35% on the previous day.

Since September 2021, the central bank has lowered interest rates by 500 basis points. As a result, inflation was 21.31% in November 2021, according to the Turkish Statistical Institute (TÜIK).



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