At a time when the Turkish lira is witnessing a sharp decline in the foreign exchange market, which has reached record levels, the Turkish Central Bank reduced the interest rate by 1%, to reach 15%, despite inflation remaining near 20%, which led to an increase in the currency’s decline and affected the response do markets.

Turkish lira

The price of the Turkish lira fell against the dollar after the central decision from 10.7 to 10.85 liras, with expectations that it would continue to decline to close at 12 liras by the end of 2021. The lira lost about a third of its value this year, compared to the price of early 2021 when the dollar exchange rate did not exceed 7.4 liras.

The central decision comes after Turkish President Recep Tayyip Erdogan said - yesterday, Wednesday - in front of the parliamentary bloc of his Justice and Development Party in the Turkish Parliament, that "the government is determined to remove the scourge of high interest from its people."

The lira has fallen nearly 60% against the dollar this year, amid President Erdogan's repeated calls for lower interest rates and rapid changes in the leadership of the central bank.

The lira's recent decline was also exacerbated by the rise of the dollar, after higher-than-expected inflation data in the United States.

Economists believe that reducing interest has an impact on the rise of the dollar and precious metals, due to the deficit in the budget of the Republic of Turkey between import and export, and also because it has debts amounting to 450 billion dollars at present, and that if the state budget was stronger than this, this decline would not have occurred in lira.

High US interest rates usually attract money from emerging economies with high external debt such as Turkey.

The Turkish government may resort to a plan to deal outside the dollar framework with some countries, especially after its agreement with Iran and Russia on this, and a few days ago with South Korea as well, to get rid of the dollar’s ​​pressure.

Erdogan adopts the theory that lowering interest rates will lead to lower inflation (Anatolia)

Inflation and debt

Erdogan is described as the enemy of interest rates, and espouses the theory that lowering interest rates will lead to lower inflation.

This policy appeared more clearly after Erdogan appointed Shehab Kavcioglu as the new governor of the Central Bank, last March, in a change that is the fourth of its kind in less than two years, after a series of dismissals that affected the old governors, namely Naji Aghbal, Murat Uysal and Murat Testin. Kaya.

The headline inflation rate reached its highest level in two and a half years at 19.58% last September, while the basic measure confirmed by Kavcioglu last month was 16.98%.

Deutsche Bank expects the interest rate cut to lead to higher inflation;

The international credit rating agency, Standard & Poor's Global, also expected a sharp decline in the Turkish lira over the next three years, and a rise in the level of non-performing bank loans to double at 8% in the next 12 months.

The Central Bank's decision comes while a pessimistic view hangs over the Turkish interior, as data from the Turkish Statistical Institute showed a decline in Turkish consumer confidence to 57.8 points.

The consumer confidence index scored 57.6 points last October, its lowest level in nearly 10 years.

The current confidence level indicates a pessimistic outlook, and it should exceed 100 points in order to signal optimism.

Standard & Poor's Global Agency expects a sharp depreciation of the Turkish lira over the next three years (Getty Images)

Markets and Investment

In the context, Muhammad Klub, an economic researcher at Yildirim Beyazit University in Ankara - told Al Jazeera Net - that the exchange rate of the Turkish lira is directly related to the interest rate, and despite the industrial transformation in the last two decades, the economy depends largely on the financial markets that have had an impact. The largest in determining the exchange rate on the basis of supply and demand.

According to researcher Klopp, the effects of the interest rate cut fall into two parts:

Financial markets:

With the increase in negative expectations about the future of the lira, it is expected that bank deposits and savings in Turkish lira will migrate to foreign currencies to maintain their value, which will raise the demand for foreign currencies, and thus will lead to a decrease in the exchange rate of the Turkish lira, and this decline will also result in selling of shares Listed companies, and thus a double loss for the Turkish economy.

Production and investment: The

low exchange rate resulting from the low interest rate pushes Turkish exports to the top, and this is evidenced by Turkey achieving a historical record in the export sector. The low currency of the tourism sector is contributing to the increase in the number of incoming tourists, as noted recently, according to reports from official authorities.

On the other hand, companies importing from abroad lose due to the depreciation of the lira, because they pay larger sums for importing goods and services.

Likewise, consumers at home, because the depreciation of the lira leads to an increase in prices at home, and thus an increase in inflation rates.

The economic researcher at Yildirim Beyazit University concluded by saying that the Turkish president is betting by reducing the interest rate on export revenues and moving the wheel of production, as well as tourism to improve the exchange rate to increase the demand for the Turkish lira.

While the significant recovery in Turkish exports and economic activities within the country made Standard & Poor's agency express its expectations that the Turkish economy will grow at a rate of 8.6% by the end of this year.

The agency expected the Turkish economy to register a growth rate of 3.3% in 2022, and 3.1% in both 2023 and 2024.

With regard to expectations of unemployment rates in Turkey, the report stated that the rate for the year 2021 is 12.6%, and that it is expected to decrease to 12.2% in 2022, and to 11.2% in 2023. The agency also expected that inflation will record by the end of this year 17.3%, and 12 % in 2022, 9.5% in 2023, and 9.2% in 2024.

The question remains: will the record numbers of exports and tourism be enough to curb the devaluation of the currency, or is there no escape from raising the interest rate?