On Friday, the Turkish Lira fell to an all-time low, as traders continued to sell it after the surprise announcement on Thursday about reducing its interest rate despite 80% inflation in the country.

Rate cut’s impact on Lira

On Thursday, bankers and analysts said that the central bank’s decision to cut the interest rate from 14% to 13% was probably because of the potential boom in tourist revenue.

Moreover, the decision was also in accordance with the long-term drive of President Tayyip Erdogan to reduce borrowing costs.

There was a 1% drop in the Turkish Lira on Thursday against the US dollar to 18.15 over worries that it would lead to even more inflation.

On Friday, the Turkish Lira had reached 18.0870 by 1553 GMT, which left it slightly above a record low of 18.40 against the US dollar.

It had reached this value during its last major meltdown that had occurred back in December. However, the currency did touch an ‘intraday’ low briefly and it set a record low on Thursday of 18.089.

Market analysts said that the rate cut came as a signal from the central bank that the recent softening in loan growth was not good for it and it wanted to make the switch to short-term growth again.

Other consequences

Analysts also stated that if the central bank’s decision turns out to be right, then it would only increase the deficit of the country’s current account and would push the Turkish currency lower in the next few months.

They also added that the lira would depreciate sharply and this would only push the Turkish central bank into hiking its policy rate once more in the last quarter of the year.

On Thursday, the central bank had taken the markets by surprise when it cut its interest rate by 100 basis points. This was the first move that the monetary authority had made in the year.

It had given no signal that a rate hike was coming, even though the badly depleted foreign reserves of the country have almost tripled to $15.7 billion since early July.

This is because there has been a flood of tourists in the country, who had been unable to visit in the last two years because of COVID lockdowns.

Erdogan’s solution

Most central banks increase interest rates in times of rising inflation and Turkey’s inflation has reached its highest in 24 years.

But, rather than following the same path, the Turkish central bank is following Erdogan’s policy of promoting exports, economic growth, and investment.

There has also been a rise in exports, due to low lending rates. Foreign inflows have also gone up because of the tourism season in Turkey which has reached close to the same numbers as before the pandemic.

Traders are also speculating that the country has signed a funding deal with Russia, but no information has been disclosed by the authorities.

The policy-setting committee of the bank said that they needed to take action because there were indicators that the third quarter had seen some loss in economic momentum.

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