Turkey’s president, Recep Tayyip Erdoğan, has vowed to take on the currency markets after a fresh cut in his country’s interest rates sent the lira plunging to its lowest ever level against the US dollar.
Erdoğan said Turkey’s destiny would not be determined by the level of borrowing costs or by foreign exchange speculators despite signs his unorthodox approach to running the economy was leading to rapidly rising inflation.
The Turkish president announced the minimum wage would be increased by 50% to maintain its US dollar value and promised unspecified measures to ensure stability in the coming days.
His move followed a fall of more than 5% in the lira’s value against the dollar triggered by an announcement by Turkey’s central bank that interest rates were being cut by a percentage point, a bigger fall than the markets had been anticipating in light of the lira’s recent weakness.
At Erdoğan’s insistence, interest rates have been cut by one percentage point five times since September, a period during which the currency has halved in value against the dollar and inflation rose to 21% – more than four times the official 5% target.
The central bank has intervened in the currency markets four times in the past two weeks, selling its depleting stock of dollars in an attempt to halt the lira’s decline.
However, analysts warned the latest cut in interest rates would intensify the pressure on the currency.
“It is a bold move that will certainly cost Turkey a lot of money, and headache. The kneejerk reaction is a heavy sell-off in the lira,” said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.
Marek Drimal at Société Générale said the increase in the minimum wage “will fuel inflation pressures further, together with the cumulative impact of the lira’s weakness”.
Commenting on the central bank’s plan to reassess its monetary framework in the first quarter, he said the best-case scenario was probably that it refrained from further cuts.