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Turkish Lira recovers after crashing again

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Turkey’s lira recouped 2.4% of its value on Friday after hitting another low, as the currency crashed when the country’s Central Bank announced that interest rates would be slashed again.

The Turkish lira had reached its lowest ebb Thursday but was trading slightly better at 10.88 against the US Dollar on Friday.

Acting on instructions of Turkey’s President Recep Tayyip Erdogan, the central bank announced that it would be cutting interest rates by 100 base points to 15%, seen as dangerous for the emerging market economy.

On Thursday, it recorded its worst performance as the currency hit a record low of 11.3, bringing its losses this week to nearly 12% after the central bank cut its policy rate by 100 basis points.

Turkey’s central bank is seen as bowing to Erdogan’s calls for stimulus as it forges on with what analysts see as a reckless easing cycle given the lira’s meltdown and the 20% rise in inflation.

Erdogan said he would keep battling interest rates “to the end”.

So far, Turkey’s central bank has slashed rates by 400 points since September, setting it well apart in the world where policymakers are tightening purse strings.

In comments to Reuters, Emre Cayirli, manager at ALB Forex research department, said the lira could decline to around 11.5 USD (on expectations of another cut in December, and the selloff could continue, sharpened by a strengthening dollar).

“Inflation could continue to rise in relation to the increase caused by the rise in the exchange rate, a potential rise in demand in the economy and higher import prices,” he said.

This year, the lira has lost as much as 39% after touching a high-water mark of 6.9 against the USD in February.

The central bank said much of the price pressure was temporary and would persist through mid-2022, adding that it has some room for another possible rate cut next month.

The monetary easing leaves Turkey’s real yields sharply negative and runs against the grain of a world where central banks raise rates to head off global price rises.

However, Erdogan’s interference with policymaking at the central bank, coupled with the occasional spat with the West, keeps fuelling the country’s currency decline.

Earlier in October, Erdogan had characterised several Western ambassadors, including those of Canada, Denmark, France, Germany, and the United States, as ‘Personas non Grata’ after urging Turkey to release philanthropist Osman Kavala.

A known critic of Erdogan, Kavala, a Turkish businessperson, activist, philanthropist, and prisoner, has been in Turkish prisons for four years, accused of participating in the 2016 coup d’état.

Erdogan has also become notorious for sacking central bank personnel for not agreeing with his rate slashing policies.

In October, Erdogan sacked three Central bank policymakers, two of whom opposed the bank’s 100 basis-point rate cut to 18% last month.

Rumours circulating in Turkey say Erdogan plans to replace the governor of the central bank Sahap Kavcioglu.

It would be the fourth time Erdogan sacks a Central Banker since 2019.