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The Turkish lira is sinking. It is obvious how to stop the decline in value. But President Erdogan sticks to his confused ideas and prefers to fire the head of the central bank.
Turkish President Erdogan doesn’t believe in rate hikes, regardless of the growing depreciation of the local currency.
The Turkish population sees the purchasing power of their money decrease rapidly. The external value of the lira plummets from one historical low to another. Inflation, which is just under 12%, also contributes to the fact that money can buy less and less. Suffering Turks do what they often do in such situations: they exchange the lira for harder currencies or gold. Foreign investors are also moving away from the emerging market. It is worrying. Because Turkey is struggling with a notoriously bad checking account. To finance this deficit, the country needs foreign capital. But in times of collapsing tourism revenues, it’s no clearer than ever where the capital will come from.
What should be done? The answer is obvious. The central bank is supposed to make money more expensive, i.e. raise the key interest rate, which is 10.25%. This became evident as early as 2018, when a similar currency crisis eased only after the benchmark interest rate – after too long hesitation – was finally raised to 24%. At that time, however, the central bank enjoyed even greater independence than it does today. Since President Erdogan fired the head of the central bank in July 2019, it has been clear that the autocratic leader also has the final say on monetary policy. But Erdogan doesn’t want to know about higher interest rates. Rather, he is convinced that a weak currency and high inflation must be fought with low interest rates. On Friday night he promptly fired the head of the central bank again.
This is – to say the least – a very unconventional view. But Erdogan does not tolerate any contradiction. And no one around him has the courage to teach the president the basics of monetary policy. The currency crisis is much better minimized, for example as a marginal note that only affects buyers of foreign luxury cars or expensive vacation trips. As long as this denial of reality continues, the lira will continue to decline in value. Erdogan may be used to ruling Turkey with authority. But the biggest economic problem, namely the lack of confidence in monetary policy, cannot be forced. Confidence must be developed, with measures that have nothing in common with the president’s crude theses.
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