The Turkish lira fell by as much as 1.5 per cent against dollar and was trading around the 8.45 mark on Wednesday afternoon, as concerns about the central bank's credibility and inflationary pressure mounted.
Turkey's central bank is nominally independent but has been under constant pressure from President Recep Tayyip Erdogan to lower interest rates.
The Turkish leader has fired three central bankers since 2019 because they were either raising borrowing costs or not lowering them rapidly enough.
Erdogan is famous for subscribing to the unorthodox belief that high interest rates cause inflation instead of tamping it down by hiking the cost of doing business.
Central Bank Governor Sahap Kavcioglu said that the current policy stance was tight enough to bring inflation down in the fourth quarter and that high-interest rates were limiting Turks' access to credit, even as data showed inflation rose to 19.25% in August, well above the target of 5% and the central bank's benchmark rate of 19%.
The bank is expected to begin cutting rates in coming months due in part to pressure from President Tayyip Erdogan for stimulus.
Turkey did not necessarily benefit from lower lending costs. With the increase in state risks and the deterioration of banks’ balance sheets, it has become more difficult to borrow in foreign currencies abroad.
Banks cannot reduce their foreign-currency debt immediately, because they need to repay or carry over existing huge obligations. Although foreign-currency loans are cheaper, Turkish companies fear that they will have to struggle to generate enough foreign-currency revenue to repay them.
Thus, it will be difficult for banks to improve their position, in terms of foreign currencies, while continuing to sell reserves to support the lira.
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