USD/TRY momentarily vaults 14.00 level as Erdogan doubles down on calls for more rate cuts

• USD/TRY recently hit record highs above 14.00 in wake of further calls for rate cuts from President Erdogan.
• The Turkish President said interest rates would fall significantly ahead of the 2023 election.

USD/TRY vaulted above prior record highs at 13.50 in recent trade and printed fresh record levels above 14.00 for the first time. The pair has since dipped back under 14.00, but continues to trade in an extremely volatile manner in wake of the latest round of monetary policy commentary from Turkish President Erdogan.

Erdogan comments

Erdogan said in an interview with on State TV that interest rates would fall significantly ahead of the 2023 election as Turkey continues to push back against high interest rates with the “back of its hand”. Erdogan reiterated his stance that it is high interest rates that are the cause of inflation, and that by lowing rates, he can boost investment, employment, growth and production. He added that in 2022 he would protect workers from price hikes in 2022 with a new minimum wage.

Things going from bad to worse for the lira

Over the past three weeks, during which time USD/TRY has surged from under 10.00 to current levels close to 14.00, the lira has lost roughly 25% of its value against the US dollar. That takes losses on the year to close to 45%, making TRY far and away the worst performing of the major EM currencies this year, worse even than the Argentinian peso, which has lost about 17% of its value versus the US dollar. Remember that Argentina is a country where the Consumer Price Inflation is currently running close to 50%.

The eye-watering losses for the lira have come as President Erdogan has tightened his control over the CBRT’s monetary policy decision making by continually firing dissenters that oppose his wishes to lower rates in the face of rising inflationary pressures. As a result, any notion of CBRT independence and credibility has now gone largely down the drain and markets increasingly view monetary policy commentary from Erdogan as akin to commentary being made by the governor of the CBRT.

Thus, when Erdogan talks about further rate cuts ahead of the 2023 election, despite Consumer Price Inflation nearing 20% in October, investors within Turkey are becoming fearful that the President is driving the country towards hyperinflation. Hence the capital flight that is putting the lira under such pressure. Erdogan shows no signs of realising that it is his unorthodox economic policy (Erdoganomics, as some have called it) that is the primary cause of high inflation and continues to blame others (such as speculators for lira weakness and companies for “price hikes”).