Turkey: Turkish lira nosedives after Central Bank's November meeting
November 30, 2021
The Turkish lira nosedived following the Central Bank’s announced rate cut on 18 November, and it has continued to set new record lows in the days and weeks after the Monetary Policy Committee’s meeting. On 26 November, the currency traded at TRY 12.43 per USD, marking a massive 23.2% month-on-month depreciation. Moreover, the lira was down 36.7% year-on-year and 40.1% year-to-date on the same day.
The sell-off began on 17 November when the Turkish president, Recep Tayyip Erdogan, reiterated his commitment to continue fighting against high interest rates. The next day, the Central Bank delivered another 100 basis-point rate cut. This sent the lira into a frenzy, and it set a new record low of TRY 12.82 per USD on 23 November. The renewed pressure on the currency will likely see greater dollarization of wages and pensions, in turn sending the lira lower amid less demand. Meanwhile, President Erdogan ordered a probe on 27 November into possible currency manipulation after the lira’s slide.
Looking ahead, the Turkish currency will continue to suffer against the USD in the remainder of this year and in 2022, weighed on by unorthodox policy-making. Political interference in the country’s monetary policy will continue to bruise the credibility and independence of the Central Bank, further hurting investor sentiment and weighing on appetite for Turkish assets. Moreover, with inflation forecast to remain elevated, any additional easing of the monetary stance risks an even more negative real interest rate, which will exacerbate matters.
The fall of the currency has been accompanied by greater opposition to the country’s monetary policy direction and leadership, with protests breaking out in Istanbul and Ankara in late November. Analysts at the EIU added that “some private-sector figures have become bolder in opposing Mr. Erdogan's policies. The treasury and finance minister, Lutfi Elvan, has also made comments apparently critical of the Central Bank's policies.” Commenting on the outlook for the currency, they noted:
“Internal and external imbalances, elevated current-account deficits and still-high inflation, alongside a gradual normalisation of monetary policy in the U.S. and the Euro area, will all contribute to a depreciation of the lira against the U.S. dollar in 2022–26. Policy unpredictability, poor international relations, foreign investors' concerns regarding the Central Bank's independence, and a reliance on short-term capital inflows will also weigh on the currency.”
Author: Jan Lammersen, Economist