Turkey’s lira slumped by more than 5 percent on Tuesday after President Recep Tayyip Erdoğan doubled down on a pledge to keep interest rates at below inflation to spur economic growth and exports. The lira dropped to as low as 11.99 per dollar in Istanbul. It was trading down 4.3 percent at 11.86 per dollar at 10:52 a.m. local time. The lira sank to new depths, taking losses this year to almost 40 percent, after Erdoğan defended a policy of cutting interest rates on Monday. He reiterated his unorthodox belief that higher borrowing costs were inflationary and vowed to emerge victorious from “an economic war of independence”. “Feels a bit like any anchor for the lira has gone,” Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London, said on Twitter. “If the central bank has no mandate to hike policy rates, and limited FX reserve cover, no IMF, then what is left. Huge economic experiment.” The central bank has lowered interest rates to 15 percent from 19 percent over the past three months, even as inflation accelerated to almost 20 percent. Erdoğan, who gained vast executive powers at elections in 2018, has exerted authority over central bank policy after sacking three governors since 2019 and replacing a majority of its senior management. Turkey may be in the middle of a currency crisis reminiscent of extreme volatility seen in 2018, London-based research firm Capital Economics said last week. The experience from 2018 shows that intraday falls of more than 10 percent were possible, it said. The central bank indicated that it would cut rates again in December after lowering borrowing costs to 15 percent from 16 percent last week. Turkey is finding out the hard way how a currency crisis can take longer to occur than anticipated, but then proceed faster than thought possible, Desmond Lachman, a fellow at the American Enterprise Institute and a former IMF official, said in a column for Barron’s late last week.
Ahval