Turkey’s Roller Coaster Lira
2021 was a turbulent year for the Turkish Lira, for various reasons such as numerous interest rate cuts being ordered by the president. Come read our blog to learn more about Turkey’s roller coaster lira.
December 2021 was a tumultuous time for the Turkish Lira. Despite rising inflation, the Turkish president ordered multiple interest rate cuts in 2021. Turkey's Central Bank cut interest rates to 14% when inflation was 21.6%. This intervention resulted in the Lira plummeting, notably in the last months of the year. Government interventions and a government-backed savings scheme brought some relief to the beleaguered currency. However, nobody expects the stability to last, as President Recep Tayyip Erdogan is determined to keep interest rates below inflation.
The Lira’s Dismal 2021
Last year, the Lira lost 44% of its value against the dollar. So far this year, it has only lost 2%. In December, inflation was at a two-year high of 36%. The Central Bank estimates that it will go down to 23.2% by the end of 2022.
The whiplash exchange rate saw the Lira trade at 18.36 against the dollar and rally to 14.8 on a single chaotic trading day after announcing a scheme to encourage the country's savers. On the same day, Turkey's main stock exchange had to halt trading after a 5% decline; this was the exchange's second consecutive shutdown. The stock exchange trimmed its losses to just 1.4% later that day.
The Lira lost value to a high of 18.4 per dollar in December and strengthened to 13.5 per dollar in January 2022.
Government Intervention Offers Some Stability
The state-backed savings scheme compensates savers' Lira holdings for any exchange rate losses they incur. So far, interested parties have put TL196 billion into the scheme; Turkey's total banking sector deposits are TL5.4 trillion.
The government opened the scheme up to companies on January 11th and offered additional incentives. According to the government, the scheme is a success, but there is concern over the government footing the bill for any exchange rate losses because it may drain its resources.
Inflation is a global phenomenon right now. Central banks worldwide are forced to adopt the orthodox strategy of raising interest rates to lower inflation. President Recep Tayyip Erdogan believes otherwise; he has repeatedly said he won't raise interest rates.
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