Gravity Exists

inflection point

Despite Lira Collapse Erdogan Remains Defiant

November 22, 2021


The continued decline of the Lira weighs heavily on the Turkish economy, with the most recent CBRT data measuring total external debt for the nation at over 58% of GDP.

ChartThe continued decline of the Lira weighs heavily on the Turkish economy, with the most recent CBRT data measuring total external debt for the nation at over 58% of GDP.

After a brief respite over the weekend, the Turkish Lira declined against the US Dollar on Monday, flirting with all-time lows again after losing 12% last week alone. Last week’s fall brings the total reversal for the Lira to more than 50% for 2021.

Turkish President Recep Erdoğan’s controversial intervention into his nation’s monetary policy has spurred the Lira’s devaluation in large part. The CBRT (Turkey’s central bank) has not had stable leadership in recent years as Erdoğan has pushed unorthodox theories on the relationship between policy rates and inflation. Şahap Kavcıoğlu, an ideological ally of the president, ascended to the role of CBRT governor in March following two predecessors who lasted less than two years each. Since September, Kavcıoğlu has slashed the benchmark one-week repo rate by 400 basis points.

These cuts fly in the face of conventional economic wisdom. Turkish inflation levels are highly elevated, with October consumer prices registering 19.89% year-over-year growth and producer prices rising an eye-popping 46.31 % – the highest level reported since the 2018 Lira swoon. The official CBRT projection for average CPI in 2021 stands at an annualized 18.4% versus a bank target threshold of 5%.

Critics see Kavcıoğlu and Erdoğan’s move to drive real rates deeply negative in the face of skyrocketing prices as a cynical political calculation. Erdoğan faces a tough reelection race as early as 2023 with declining popularity. Many analysts see the rate reduction as a push to fuel growth at all costs despite risks to business segments increasingly crushed by the rising service cost for dollar-denominated debt.

Many currency strategists argue that rate hikes are inevitable in the coming quarters as political posturing loses out to harsh economic reality. Critically, no primary banks or asset managers have yet raised concerns of potential regional or global contagion from the Turkish rate experiment, nor has the stability of the nation’s primary financial institutions been called into question.

For now, the primary threat to President Erdoğan’s gamble remains with his constituents as the spiraling cost of food, medical care, and other necessities weigh heavily on the Turkish people.

Key Points

  • The Turkish Lira declined by more than 12% against the US dollar last week. 

  • Despite annual consumer inflation of 19.89%, the Turkish Central Bank reduced its benchmark policy rate on Thursday for the third time Since September, propelling the Lira to fresh all-time lows.

  • Turkish President Erdoğan has heavily politicized monetary policy by firing three central bank Governors in rapid succession and promoting rate cuts despite rising prices in moves viewed by critics as a political strategy.