Lira slide accelerates as Erdoğan vows to continue slashing rates

The Turkish lira continued to slide to a record low after President Recep Tayyip Erdogan again vowed to cut interest rates despite rising inflation.

The currency fell to 17 against the dollar on Wednesday, which extended the steep glide this week that came after Erdogan, a lifelong opponent of high credit costs, opened against them in an enthusiastic tirade.

The Turkish president said earlier this week that the country had “wasted years” with the misconception that prices should be controlled by using higher credit costs to suppress consumption. Such a policy, he said, has only benefited “those who live a magical existence and fill their pockets [the proceeds of] High interest rates “, including foreign investors.

Erdogan Promised to lower interest rates even further even though inflation has reached A 23-year high of 73.5 percent Last month, he said: “This government will not raise interest rates. On the contrary, we will continue to lower interest rates.”

The pound fell 2% on Wednesday, bringing its annual losses to 22% after falling almost 45% in 2021. A year ago, the currency traded slightly more than the TL8 against the dollar.

The steady decline in the currency in recent weeks has threatened to test the record low hit in December, when the country plunged into a currency crisis after Erdogan ordered the central bank to declare a series of interest rate cuts despite rising inflation. Aside from a transient decline beyond the TL18 over the course of last year, the currency has never been consistently traded at such weak levels.

Turkey has one of the lowest interest rates in the world in real terms, standing at minus 59.5% after taking inflation into account. Negative real interest rates deterred Turkish citizens from keeping their savings in pounds, tarnishing the temptation of foreign investors to hold Turkish assets compared to rivals in emerging markets.

Erdogan and Turkish officials justified last year’s aggressive rate cut by claiming they are chasing “new Economic model“. They argued that they could curb inflation by harnessing the weak currency to increase exports and investment and eliminate the country’s long-standing trade deficit.

Even before Vladimir Putin’s invasion of Ukraine, critics warned that the plan was a dangerous economic experiment that could lead to the collapse of the Turkish lira and runaway inflation.

The conflict has added to the challenges facing Turkey, which imports most of its energy, by raising global oil and gas prices and causing a widening current account deficit that has created additional demand for foreign currency.

A line chart of% showing Turkey's real interest rate decline

MUFG analysts Ehsan Khoman and Lee Hardman said in a note to clients this week that it was “unequivocally unsustainable” for Turkey to maintain this approach, warning that pressure on the currency “is likely to continue in the absence of a U-turn in policy.”

The rising inflation rate also has political implications for Erdogan. While Turkey has enjoyed strong growth thanks to a loose monetary policy, rising cost of living and the pressure on the pound have eroded public support for the Turkish president ahead of the June 2023 elections.

Erdogan admitted on Monday that there was a “cost of living problem” in his country, but insisted that his economic model would soon pay dividends. He said: “We have set aside the economic prescriptions imposed by imperialist financial institutions that make the rich richer and make the poor poorer by raising interest rates.”

Lira slide accelerates as Erdoğan vows to continue slashing rates Source link Lira slide accelerates as Erdoğan vows to continue slashing rates

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