Turkish exchange rates driver#

Erdoğan’s insistence on further rate cuts and the loss of consumer confidence in his economic policies are the major factors driving depreciation. It is still too early to say whether TL depreciation will continue, but more turbulence is likely in the coming months. This resulted in a temporary rebound, but it is unlikely to be sustainable in the long term in light of the country’s limited reserves and negative real interest rates. 1 the CBRT did step in to prop up the currency by selling nearly $1 billion worth of its foreign reserves. More rate cuts have been promised and will likely be made at the MPC meeting in mid-December. 17 Erdoğan said he would continue his fight against interest rates “to the end” and his staff tried to present the unorthodox policy as a well-planned strategy for the economy.

Turkish exchange rates driver#

Domestic investors were the main driver of the currency crisis given their desire to sell TL as the CBRT’s policy rate (15.00%) fell well below the official inflation rate (19.89%).ĭespite severe TL depreciation, on Nov. There was no foreign policy development at play this time around, like the jailing of an American citizen in 2018, or external shock, like the pandemic in 2020. It was this final decision that resulted in a speculative attack on the Turkish currency. Before the November meeting, Erdoğan indicated a new rate cut was in the offing, and this too was delivered by the MPC, which cut the policy rate by a further 100 bps. This move was possibly forced by Erdoğan and sent a message to the bureaucracy that he is in charge of all policy decisions and no government official should listen to Kılıçdaroğlu’s appeal to resist his orders. In the MPC’s October meeting, the policy rate was cut by a further 200 bps, definitely above market expectations, and not supported by any recent data. Kemal Kılıçdaroğlu, the leader of the main opposition party, the Republican People’s Party (CHP), called on government officials not to follow Erdoğan’s orders that are against the public interest and then held a meeting with Governor Kavcıoğlu, which was both unprecedented and unexpected. Following the September meeting, three members of the Monetary Policy Committee (MPC) were dismissed without any explanation and two new members in line with Erdoğan’s unorthodox theory about interest rates were appointed. In line with this, the CBRT cut its policy rate by 100 basis points (bps) to 18.00%. This action was inconsistent with the bank’s official mandate and was interpreted as a compromise on the part of CBRT Governor Şahap Kavcıoğlu, under pressure from President Recep Tayyip Erdoğan, to save his job. In September, the CBRT suddenly declared that the policy rate would be cut based on targeting core instead of headline inflation, without any previous announcement. Meanwhile, global commodity and energy prices remain high (despite the recent dip in oil prices), and expectations regarding inflation have deteriorated significantly, prompting the TL exchange rate to drop from 8.30 to 13.60 to the dollar in less than three months. The Central Bank of the Republic of Turkey’s (CBRT) early cuts to the policy rate since September have resulted in an exodus of foreign capital and a rush in demand for foreign exchange among domestic investors.

The Turkish currency is once again under speculative attack, similar to previous episodes in July 2018 and October 2020.

2, the Turkish lira continued its steady decline against the dollar, bringing its losses for the year to nearly 50%. Following the resignation of the finance minister and his replacement by a loyalist on Dec.