Why Do Dollars and Inflation Rise When Interest Rates Fall?

Countries that produce in the fields of industry, agriculture and technology do not have difficulty in establishing an economic balance with the implemented policies. Real and nominal interest rates, inflation, currency fluctuations, borrowing, risk premium… There are many confusing concepts in doctrines and basic economics teachings. However, the relationship and discussions between interest and exchange rates are actually simply understandable.

The Central Bank’s lowering of the interest rate from 18% to 16% on October 21, 2021 has already increased the record-breaking dollar almost every week throughout the year, 9.48 TL level We saw. So why, why Turkey’s economic policies affect the exchange rate difference, which permeates every corner of our lives, in a way that citizens do not want at all.

If the Central Bank lowers the market rate, the banks also reduce the deposit rate:

Typewriter1984 Editor-in-Chief and Economist Enes Ozkan, “People want to protect the value of their money against inflation, there are various tools they can use for this. The most common tool is to lend your money to a bank, also called a deposit.” says. In short, the bank where you deposit 100 TL in your pocket into your account uses this money, gives you a share of the profits it makesi.e. it pays interest. For example, if the bank gives 19% interest, your 100 TL will increase at this rate after one month.

NOTE: The interest rate announced by the Central Bank is called the “market rate”. Banks use market rates for the rate of interest they will add to your deposits.

Commercial banks depend on the market rates announced by the Central Bank for the rate of interest payment they will make on the deposit in your account. Market rates are announced just like on October 21, and banks determine deposit rates by looking at the new rate. This relationship is directly proportional. If the central bank lowers the market rate, banks will also lowers deposit interest. Less interest is paid on the money in your account, and your interest income decreases.

If the deposit rate falls when inflation is high, people show high demand for different investment instruments to protect their money: for example dollars.

When banks reduce the interest paid on your 100 TL due to the decision of the Central Bank, you may want to evaluate your money in different ways. In central economies, that is, where decision makers are institutions and individuals, the most preferred alternative tool is foreign currency investment. Gold and other valuable currencies, especially the dollar, can be preferred. Enes Ozkan, “In such a case, the most used vehicle in Turkey was the dollar.” he says and adds:

“When you import, you usually pay the cost of this import in dollars. Holding dollars in your hand integrates you into international markets. Those who want to protect their money when the interest rate drops also buy dollars. As the demand for the dollar increases, the price of the dollar also rises.”

The latest inflation figure announced by TUIK is 19%, as announced by the Central Bank. well above the market rate. Apart from this, the higher inflation felt by the citizens in Turkey lowers the confidence in the figures announced by TURKSTAT.

In addition, the depreciation of TL against foreign exchange rates results in you paying 100 TL, even if you import the service, raw material or product you imported for 10 dollars, that is 50 TL yesterday, for 10 dollars today. This is reflected in the prices of the products on the shelves, purchasing power begins to decline, As a result, inflation rises.