It is common knowledge that a key rate hike positively affects a currency rate. But Turkey has its own magic rules, not only when it comes to ice cream salesmen. The increase in interest rate collapsed the lira to unexplored depths. Let’s investigate how this could have occurred.
The traditional approach of combating inflation involves interest rate hikes. Typically, the value of a currency tends to rise – we can see this trend in various currency pairs, EUR/USD for example. The chart below illustrates the outcomes of Turkey's alternative approach to tackling inflation.When inflation reaches 85%, it can be an indication that something is going wrong.
Why didn't this happen earlier? Two words – currency interventions. The Turkish government regularly used this method to support the lira, and in the end, the currency reserves turned out to be depleted.
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