Turkish lira falls to new low as monetary policy deteriorates

The Turkish lira fell to a new record low, piercing $14, as investors braced for President Recep Tayyip Erdogan’s push with another rate cut later in the week. this despite intense inflation.

The currency, which has fallen 40% since the central bank embarked on a rate-cutting cycle at the behest of the Turkish leader in September, on Monday surpassed the threshold set by authorities. previously reluctantly accepted.

The lira fell more than 4% to 14.45 against the dollar in London trading on Monday. It starts in 2021 around TL7.

The new sale comes after President Erdogan’s increasingly unorthodox approach to running Turkey’s $795 billion economy prompted ratings agency S&P to lower its outlook on the country. to negative at the end of last week, which means that the debt rating of the Turkish government could be cut further. garbage territory.

“The negative outlook reflects what we see as increased risks to Turkey’s externally leveraged economy over the next 12 months due to extreme currency volatility and rising inflation, in context of mixed policy signals,” it said.

In recent weeks, Erdogan has announced that he is looking to implement a new economic model for his nation of 83 million people.

He argued that by cutting rates, the country would benefit from a competitive currency that would boost exports, attract foreign direct investment and create jobs.

Economists warn that it will come at the cost of exacerbating inflation that already rose at an annual rate of 21% last month, according to official data, and hit living standards.

It also risks financial instability in a country that relies heavily on foreign finance to keep its economy afloat.

US investment bank Goldman Sachs said the need to increase – not cut – interest rates was “even more acute” this month as it deemed the current approach “unsustainable”.

“However, the authorities appear committed to maintaining a low exchange rate policy,” it said.

The consensus expectation among analysts is that the central bank will cut the benchmark lending rate by 1 percentage point to 14% on Thursday.

However, the central bank’s decision earlier this month to resume policy seeking to protect the lira has led some analysts to question whether Erdogan may be reaching the limit of his tolerance. on currency weakness – and whether the president can authorize a pause in the rate-cutting cycle.

The central bank has sold an estimated $2 billion to $3 billion on three occasions since the start of the month as the coin neared TL14 against the dollar, according to Barclays. The UK-based bank said there were “major uncertainties” surrounding this week’s rate decision and the coming months.

However, a senior Turkish official has signaled that Ankara is committed to continuing efforts with its controversial approach.

The new finance minister, Nureddin Nebati, told business representatives in a closed-door meeting last week that he would “not turn his back” on the policy of cutting interest rates, according to an article published Sunday by the Financial Times. journalist Abdulkadir Selvi, who is considered close to the government.

Nebati, appointed by Erdogan two weeks ago after his predecessor’s resignation, was reported that the authorities were unwilling to allow Turkey to enter an “interest spiral”.

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