Turks Rush to U.S. Dollars as Lira Continues to Sink

March 9, 2015Turkeyby EW News Desk Team

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Turkish authorities are pointing fingers at one another and scrambling to try to keep investors from rushing to the U.S. Dollar over the Turkish Lira. The Turkish Lira has plunged several times in recent weeks, bringing it to historic lows. This has left the Turkish President and Central Bank at odds with one another and investors skeptical about the long-term health of the Lira.

Turkey's President, Recep Tayyip Erdoğan, said he would hold talks with Central Bank Governor Erdem Başçı and Deputy Prime Minister Ali Babacan to discuss the declining Turkish Lira. However, he also made a statement critical of what he calls an "interest rate lobby." He suggests that political forces have caused the Central Bank to raise interest rates to 8% in order to harm Turkey's economy and lead to his ouster.

The Central Bank denies these claims and points to legal guidelines indicating that the rate is where it should be in relation to inflation. It fires back, indicating that the President's comments are inappropriate and equally politically motivated. It also cites to the legal framework under which it operates, requiring independence of the Central Bank from political influences, and reiterates that the President's criticisms are improper both factually and legally.

The Central Bank has refused to cut interest rates despite political pressures to do so. Politicians want the interest rate lowered in order to stimulate economic growth, but the Central Bank fears out of control inflation if it does so. Nevertheless, this dispute has caused the Lira to drop to 2.58 to the dollar, a new all-time low. In total, the Turkish Lira has dropped more than 6% since February, raising red flags with many potential investors and causing financial advisers around the world to suggest the Dollar over the Lira.

The drop of the Lira and rush to U.S. Dollars may also relate to employment reports from the United States indicating that unemployment rates were at 5.5% in February.

Still, the Central Bank's stalwart refusal to cow-tow to the President's demands does help to underscore the independence of the institution. Some analysts believe this may provide the anecdotal evidence needed to restore investor confidence in the Turkish Lira. Others feel the fighting will simply continue to cause a decline in the Lira as those outside of Turkey's government institutions become disillusioned, confused, or frustrated with political wranglings that could affect their bottom line.