Turkey acts to support pound drop for first time in seven years Business

Turkey’s central bank stepped in to support the pound for the first time in seven years after weeks of steep declines that took the currency to an all-time high against the dollar.

Policymakers intervened in the forex markets following what they called “unhealthy price formations”, pushing the lira up to 8.5 pc.

The currency has been in free fall in recent weeks after President Recep Tayyip Erdogan started pushing for interest rate cuts despite soaring inflation in the country.

In a speech ahead of the central bank’s announcement, he said rate cuts would continue as the 2023 election nears, causing the currency to fall further.

Erdogan, who has undermined central bank independence in recent years, said Turkey needs to wean itself off “hot money” from foreign investments that could be quickly withdrawn and focus on local industry.

“Our country is now on the verge of breaking this vicious cycle, and there is no turning back from here,” he said.

“The high interest rate policy imposed on us is not a new phenomenon. It is a model that destroys domestic production and makes structural inflation permanent by increasing production costs. We are ending this spiral.

Mr. Erdogan’s approach to monetary policy runs counter to conventional economic logic that rising interest rates help curb inflation. Bank of England Governor Andrew Bailey last week said the Turkish leader was taking an “unusual” stance.

Turkey recorded strong growth in the third quarter, with GDP increasing 2.7% amid a post-containment rebound.

Maya Senussi of Oxford Economics said the lira turmoil puts this strong growth “firmly in the mirror” as rising prices weigh on consumer spending.

Rabobank analysts said: “Failure to fight inflation appears to have strengthened the country’s competitive position, but the end cost of its policy choices could be significant.”

Central Bank of Turkey Governor Sahap Kavcioglu is the fourth since Erdogan was sworn in with expanded powers in 2018.

Mr Kavcioglu has made repeated adjustments to his forecast over the past few months, which has paved the way for interest rate cuts.

The fall in the value of the pound, which has lost nearly a third of its value since Turkey’s central bank started cutting rates in September, has increased costs for ordinary Turks, some of whom now use dollars. in place.