Monday, October 25, 2021
Lira on an unchecked decline
Erdogan accepts the decline in value “approvingly”
The lira keeps dropping further and further. But instead of raising interest rates and thus declaring war on the rise in prices, the Turkish president is cutting the key interest rate. According to portfolio manager Iredi, Erdogan approves of the decline in values. Turkey is also threatening to lose touch.
The Turkish lira is under severe pressure. Since it became known on Thursday that the Turkish central bank cut the key interest rate by 2.0 percentage points to 16.0 percent despite high inflation, the lira has lost around 3.5 percent of its value in trading with the euro. Since the beginning of the year, the loss in value with the European common currency has now amounted to around 25 percent.
“The government takes that The decline in the value of the Turkish currency is accepted “, says Ascan Iredi, portfolio manager at DZ Privatbank SA, ntv. That is nice for exports, since Turkish products are becoming cheaper and more competitive abroad, but it also has massive downsides. Turkey groans currently under a high price increase – most recently inflation reached over 19 percent, making it one of the highest in the world.
According to Iredi, the devaluation of the Turkish lira is a good sign for the German economy because it is cheap to buy. However, if the Turkish lira should become less and less valuable, it would no longer work in the long term. “The country must continue to invest, after all the machines are becoming prohibitively expensive,” says Iredi. In the long run, the devaluation of the currency is a disadvantage. “Not only is the national wealth falling due to inflation.” The country is also losing its international connection internationally. “That is very negative for companies.”
According to the prevailing economists, key interest rates are an important tool in the fight against high price increases. Central banks usually raise the key interest rate, which the banks usually pass on to their customers. The intended consequence: the number of lending and thus the amount of money in circulation will decrease. However, Turkish President Recep Tayyip Erdogan is of the opinion that high key interest rates would rather fuel inflation and also rejects them because they slow growth. He wants to use low interest rates to boost loans and investments, and ultimately the economy.
Companies won’t honor it
In response, the financial market is disciplining the Turkish lira. According to Iredi, because interest rates are not rising, the market is discharging by devaluing the lira. “Even abroad cannot solve this problem, only Turkey itself.” According to the portfolio manager, Erdogan’s approach is a political calculation that, in his opinion, will not work in the long term.
According to Iredi, in order for the Turkish lira to regain a foothold, the government would have to accept that higher interest rates would have to be raised. Otherwise, you would be at a disadvantage in the long term and risk hitting the economy against the wall. “Otherwise there will be no stopping the decline of the Turkish lira.” However, this signal could cost Erdogan votes and that is the only concern of the Turkish President. Iredi is certain that Erdogan would not honor it in the long term. “Ultimately, it will cost jobs and by then at the latest it will also have an impact on the next elections.”