Turkish lira slumps to new low as monetary policy angst worsens – Country’s central bank expected to cut rates further t

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Turkish lira slumps to new low as monetary policy angst
worsens – Country’s central bank expected to cut rates further this
week despite inflation above 20%, by Laura Pitel in Ankara DECEMBER
13 2021
Turkey’s lira fell to a record low, breaching 14 to the dollar,
as investors braced themselves for President Recep Tayyip Erdogan
pushing on with another interest rate cut later this week despite
intense inflation. The currency, which has fallen about 40 per cent
since the central bank embarked on a rate-cutting cycle under
Erdogan’s orders in September, on Monday crossed a threshold that
authorities had previously appeared reluctant to tolerate. The
Turkish Lira (TL) tumbled as much as 5 per cent to 14.62 against
the US dollar in London dealings on Monday, before recovering to
about TL14 per US dollar. The currency started 2021 at roughly TL7.
The renewed selling came after Erdogan’s increasingly unorthodox
approach to running Turkey’s $795bn economy led the rating agency
S&P to downgrade its outlook on the country to negative at the
end of last week, meaning that its rating of Turkish sovereign debt
could be cut deeper into junk territory. […]
Erdogan, a staunch opponent of high interest rates, has declared
in recent weeks that he is seeking to implement a new economic
model for his nation of 83m people. By cutting rates, he argues,
the country will benefit from a competitive currency that will
boost exports, attract foreign direct investment and create
employment. Economists warn that it will come at the cost of
exacerbating inflation that was already growing at an annual rate
of 21 per cent last month, according to official data, and hitting
living standards. It also risks financial instability in a country
that is heavily reliant on foreign financing to keep its economy
afloat. The US investment bank Goldman Sachs said the need to raise
— rather than cut — interest rates was “even more acute” this month
as it argued that the current approach was “not sustainable”.
“Nevertheless, the authorities appear committed to maintaining a
low rate policy,” it added. The consensus expectation among
analysts is that the central bank will cut its benchmark lending
rate by 1 percentage point to 14 per cent on Thursday. […]
On Monday, Turkey’s central bank announced it had intervened in
the currency market for the fourth time so far in December. The
bank had sold an estimated $2bn to $3bn on the three earlier
occasions, according to Barclays. […]
Adapted from:
https://www.ft.com/content/03b57348-f83 ... 22d034d67e
A) What kind of underlying exchange rate regime is
implied in the article? Provide a short explanation and comparison
of advantages and disadvantages of floating and fixed exchange rate
regimes in your answer
B) Consider the scenario described in the article and
focus on one changing factor at the time (ceteris paribus), explain
how monetary policy intervention by the Turkish central bank
recently influenced the exchange rate of the Turkish Lira versus
the US$. Use a diagram in your answer.
C) Consider the scenario described in the article and
focus on one changing factor at the time (ceteris paribus), explain
how the open market intervention by the Turkish central bank might
influence the exchange rate of the Turkish Lira versus the US$. Use
a diagram in your answer