Turkey faces threat of inflation and currency crisis after the pound falls


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ANKARA: The Central Bank of Turkey meeting was held on Thursday amid heated debates over high interest rates and the continued depreciation of the Turkish lira against foreign currencies.

As expected, the central bank cut rates by another 100 basis points, pushing the pound down to a new all-time low.

Turkish President Recep Tayyip Erdogan on Wednesday reiterated his constant struggle against high interest rates and high levels of inflation.

“As long as I hold this position, I will continue my fight against interest rates and inflation to the end. I cannot walk with those who defend interest rates, ”he said at his parliamentary group meeting on Wednesday. The audience, except Minister of Finance and Treasury Lutfi Elvan, applauded his speech.

But the pound is expected to continue its free fall and another drop is likely in December, experts say.

Following the move, the value of the Turkish lira fell 4%, hitting 11 against the US dollar for the first time in Turkish history. The currency has lost more than 30% in value this year.

“Despite some slowdown in growth momentum recently, Turkey’s economic performance remains outstanding with continued very strong growth in both consumer spending and industrial production,” Nikolay Markov, senior economist, told Arab News. at Pictet Asset Management in Switzerland.

“However, high borrowing costs have indeed led to a slowdown in credit growth and, along with the environment of high inflation, are limiting the prospects for growth in consumer spending.”

Turkey is the only country where the central bank has started to ease monetary policy amid persistently rising inflation and inflation expectations, he said.

“This reflects the political pressure exerted by the president on the central bank to reduce borrowing costs in order to stimulate the growth of credit to the private sector – a key pillar of its model of economic growth – and to revive the dynamics of economic growth. “said Markov.

However, for Markov, the price to pay for this time-inconsistent and suboptimal monetary policy is a persistent depreciation of the pound, which acts as the main shock absorption variable.

“The continued depreciation of the lira leads to a further increase in imported inflation, a rise in producer prices, all fueling a rise in the domestic consumer price index which requires a tighter monetary policy”, did he declare. “As the central bank cuts rates, this amplifies the negative feedback spiral between the depreciation of the pound, higher imported inflation triggering further depreciation of the pound and a further rise in imported inflation which becomes a process without end. “

Economists said the situation is of particular concern and stressed that an upward revision of inflation forecast a year in advance will be necessary as lower rates and a weakening pound would worsen inflation rates. by raising the prices of imported goods.

“Turkey is a net debtor and therefore relies heavily on foreign investors to finance its current account deficit,” Markov said. “The inability of the central bank to make the right policy decisions is doing the economy more harm than good. This could trigger a further loss of confidence among foreign investors, bringing Turkey closer and closer to a full-blown balance of payments crisis. “

In the meantime, the decision is expected to impact the purchasing power of Turkish citizens as the minimum wage drops to $ 255 in today’s currency. Food inflation rates have already skyrocketed to nearly 20 percent in October, as Turkish supermarkets began rationing food for basic items, including olive oil and sugar.

For Wolfango Piccoli, co-chairman of Teneo Intelligence in London, the decision was widely expected after Erdogan’s speech in parliament where he lobbied to ease monetary policy. But this will make the pound even more vulnerable than before, and further undermine the already weakened credibility of the Central Bank of Turkey.

“The central bank’s lax monetary policy in the eyes of the country’s risk premium will further increase the sensitivity of the Turkish lira to global financial conditions and other external developments,” he told Arab News.

Taking the problem from another perspective, Emre Peker, European director of political risk consultancy Eurasia Group, said Erdogan hopes to attract more foreign direct investment and benefit from a shift in the supply chain out of the country. Asia following the disruption caused by the pandemic.

“Government policies bet that a weak pound and an abundant labor force will help attract investment to Turkey, while supporting export-led economic growth,” he told Arab News.

But expert Peker said it was a risky bet, especially as locals lose faith in economic management and the weakness of the pound is fueling the risk of runaway inflation.

“Ultimately, the biggest losers from political interference in monetary policies are households and small and medium-sized enterprises,” he said. “It will further erode Erdogan’s popularity while stoking tensions at home and abroad as the president seeks to maintain power in the next election.”

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