Turkish lira falls to new low after latest interest rate cut

Interest rate cut sends Turkish lira to new low against US dollar

The Turkish lira fell to a new low against the US dollar on Thursday after the Central Bank of the Republic of Turkey (CBRT) decided to cut interest rates once again. 

MPC

The bank’s Monetary Policy Committee slashed its one-week repo rate to 14%, the fourth consecutive reduction since September. 

The decision is likely to be welcomed by President Recep Tayyip Erdogan who holds the heterodox view inflation can be battled by reducing interest rates. 

Last month, the Turkish leader lambasted those who think that cheaper money drives inflation and risks long-term economic harm as “false”, arguing it results in a “vicious cycle.” He added: "The high interest rate policy imposed on us is not a new phenomenon. It is a model that destroys domestic production and makes structural inflation permanent by increasing production costs. We are ending this spiral.”

According to the Turkish Statistical Institute, Turkey’s consumer price index rose by 21.3% year-on-year in November, a three-year high. The producer price index rose by 54.6%. 

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CBRT comments

In a statement, the CBRT argued: “[The]Increase in inflation in November has been driven by developments in exchange rates and supply side factors such as the rise in global food and agricultural commodity prices, supply constraints, and demand developments.”

The central bank did signal that Thursday’s reduction would be its last rate cut for the foreseeable future, stating: “The Committee decided to complete the use of the limited room implied by transitory effects of supply-side factors and other factors beyond monetary policy’s control on price increases.”

By 12:40 (GMT), the lira stood at ₺15.55058 against the dollar, a record low. The currency had started 2021 at ₺7.43 against the dollar.

The value of bitcoin against the lira rose by 5.7% to ₺766,068, 250% above the level at which it began the year.

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