Turkey’s lira fell to its weakest level in a month on concern that the central bank may decide to ease monetary policy at a meeting on Thursday even after inflation accelerated.
The lira dropped to as low as 8.67 per dollar in Istanbul, close to a record low just beyond 8.8 per dollar. It was trading down 0.5 percent at 8.65 against the U.S. currency at 12:29 p.m. local time.
Last week, President Recep Tayyip Erdoğan said a rate cut would help Turkey win its battle against inflation, which accelerated to 18.95 percent last month. Political pressure has meant Turkey’s central bank left its benchmark interest rate at 19 percent since March, even as price increases gathered pace. Erdoğan replaced the bank’s governor in March after he hiked rates.
Turkey has the fastest inflation in Europe, including ex-Soviet block countries, and only trails crisis-hit Argentina among major emerging markets. It has the 13th highest inflation rate in the world, ranking it between South Sudan and Nigeria.
“High interest will bring us high inflation, but low interest will bring low inflation. August is the breaking point, and with August, we will hopefully move to low inflation,” Erdoğan told news channel AHaber in an interview on Wednesday. Higher interest rates are recognised as a key tool to battle inflation, according to traditional economic theory.
Galloping inflation in Turkey has meant that top international banks including Goldman Sachs have scaled back their predictions for interest rate cuts, with several now predicting an easing from the fourth quarter of the year. Any premature reduction is likely to send the lira to fresh record lows.
Clashes between Erdoğan and the central bank over policy have led him to replace three of the bank’s governors in just over two years, most recently in March, when he brought in academic Şahap Kavcıoğlu for Naci Ağbal, a former finance minister who had hiked rates to 19 percent from 10.25 percent during his four-month tenure.
Several members of the central bank’s Monetary Policy Committee have also been fired since Kavcıoğlu’s arrival and heads of departments moved or dismissed. That has intensified concern among investors that a premature rate cut might be in the works. Erdoğan has also replaced board members at the Turkish Statistical Institute, which is responsible for collating and reporting inflation data.
Forecasts for inflation in Turkey are increasing. A monthly central bank survey of market participants published on Friday showed the average prediction for year-end inflation at 16.3 percent compared with 15.6 percent in July. The estimate had stood at 11.2 percent in February. Inflation in two years was seen at 10.5 percent.
The central bank has pledged to keep interest rates at above inflation and to retain tight monetary policy until a medium-term goal of 5 percent is achieved. The bank has missed that goal every year since 2011, when former central bank governor Durmuş Yılmaz hiked rates sharply to drive down inflation.
Yılmaz is now a member of a top opposition party and is a vocal critic of the bank’s practices and Erdoğan’s interference in policy.