ISTANBUL: The Turkish lira sank to a record low against the dollar on Thursday after the central bank slashed interest rates for the third consecutive month following pressure to do so from President Recep Tayyip Erdogan.
The bank cut its policy rate from 16% to 15% despite rising inflation and a fast-depreciating currency.
The beleaguered lira, the worst performing emerging market currency in 2021, sank to an all-time low of 11.30 against the dollar, but later pared down losses.
“Just a pretty ludicrous move,” BlueBay Asset Management economist Timothy Ash said in an email to clients, of the central bank’s announcement.
“Really dangerous for lira and for Turkey,” he commented.
The announcement of the bank’s decision was delayed five minutes, with bank officials reportedly telling Turkish media that it was due to a “technical failure”, dismissing social media rumours that the decision had been leaked.
Erdogan’s interest rate fight
Erdogan, an outspoken opponent of high interest rates in order to promote investment and economic growth, on Wednesday pressed for rate cut.
“As long as I am in this position, I will continue to fight against (high) interest rates, I will continue to fight against inflation,” he said.
“We will remove this interest rate trouble from the shoulders of the people. We will never let our people be oppressed by interest (rates),” he said.
In an address to his ruling AKP party members in the parliament, Erdogan also justified his decision with a verse from the Koran which strictly forbids interest.
“I cannot stand by those who defend interest,” he said.
Erdogan, who has in the past fired a number of central bank governors, is notorious for his unorthodox belief that high interest rates cause inflation instead of helping tamp it down.
Conventional economic theory states the exact opposite is true.
Erdogan once called interest rates the “mother and father of all evil.”
‘Erdogan running the show’
Fawad Razaqzada, market analyst with ThinkMarkets, said the market clearly did not take the central bank seriously anymore because it has lost any credibility it had.
“Erdogan is running the show,” he said.
“If he wants to lower interest rates he will get lower rates, regardless of how high inflation might be or how the economy is doing.”
The lira has lost 32.8% of its value against the dollar since the start of the year and the annual inflation rate has reached nearly 20% — quadruple the government target.
The central bank has lowered its policy rate by 400 basis points to 15% since August.
This means Turkey has a negative real interest rate — a policy that devalues lira assets and gives additional incentive for people to buy foreign currencies and gold.
“Stop Erdogan!” opposition leader Kemal Kilicdaroglu tweeted shortly after the central bank announcement, using a hashtag (#HemenSecim or elections right away in English).
Kilicdaroglu on Wednesday called Erdogan the real “central bank governor” and accused him of dragging the country into catastrophe.
Jason Tuvey, senior emerging markets economist at London-based Capital Economics, said that with this decision, policymakers had defied investors who had “clearly” been pushing for the central bank to stand up against Erdogan´s call for lower interest rates.
“The decision is a reminder that monetary policy in Turkey is being dictated at the presidential palace and also that the CBRT (central bank) is now more tolerant of a weaker lira than it has been in the past,” he noted.
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