Turkish lira plummets despite rate hikes

Free fall of Turkish lira continues despite interest rate increases

The Turkish lira has started the new year poorly. Despite the interest rate increases by the Turkish central bank, the free fall of the currency continues. For the first time, the dollar has broken the 30 lira mark.

Turkish central bank’s efforts

The Turkish central bank has been implementing a stricter monetary policy since June last year under the leadership of the new governor Hafize Gaye Erkan. The central bank has since raised interest rates in several steps to 42.5 percent. This should combat inflation and stop the lira’s decline.

Inflation concerns

Inflation in Turkey fell to 64.77 percent last year, but that is still the highest level since 2001. Turkey has been struggling with sky-high inflation for almost two years. The Turkish central bank expects a further increase in inflation to more than 70 percent in May. Only at the end of this year will inflation have fallen to around 36 percent.

Erdogan’s policies

Turkish President Recep Tayyip Erdogan tried to control price increases for a long time by cutting interest rates. This goes against the prevailing economic theory that you need to increase interest rates to get inflation under control. Erdogan’s policies did not solve the problems.

Currency exchange rate

The exchange rate of the lira also continues. The Turkish currency lost 60 percent of its value against the dollar in one year. Compared to the euro, this was a loss of more than 63 percent. One euro is now worth 33 liras.