Turkey’s currency slumped on Tuesday to a fresh low against the dollar after Recep Tayyip Erdoğan signalled that he would not be deterred by rising inflation from cutting interest rates further.
The Turkish president, who had declared himself an “enemy” of high borrowing costs, said the four percentage point cut in interest rates this year to 15% would spur investment, increase job prospects and boost economic growth.
Erdoğan, portraying his economic policies as “an economic war of independence”, stated that his government would not step back from its policy of lowering borrowing rates to boost growth.
However, amid concerns that his unorthodox management of the economy was likely to deter investment and increase inflation above the 20% level recorded in October, investors took flight, pushing the Turkish lira down to 12.6 against the dollar.
Some banks across the country stopped currency transactions, fearing that the steep fall in the lira’s value could spark a run on reserves, according to local newspaper reports.
There was also speculation that the government had laid plans to impose strict capital controls to prevent further withdrawals should the economic situation worsen.
The currency has fallen 40% this year, largely in response to a series of interest rates cuts by the central bank governor, Şahap Kavcıoğlu.
In October Erdoğan fired two central bank deputy governors, Semih Tümen and Uğur Namık Küçük, along with a member of the bank’s monetary policy committee, for resisting further cuts in interest rates.
The central bank saw three governors come and go in the two years before Kavcıoğlu was appointed in March, all of them dismissed by Erdoğan.
“We were either going to give up on investments, manufacturing, growth and jobs, or take on a historic challenge to meet our own priorities,” Erdoğan said in comments that sparked the fresh run on the currency.
His comments followed a speech last week when he spelled out his long-held view that high interest rates cause rather than reduce inflation. He pledged to free Turkey from the “scourge” of high interest rates.
“I’m sorry to our friends [from the ruling party] who defend [high] interest but I cannot and will not walk the same path as them,” he said.
Brad Bechtel of investment bank Jefferies said the currency was in freefall and would probably fall further over the coming weeks.
“The spark for the move seems to be Erdogan’s speech in which he declared an ‘economic war of independence’ and praised recent interest rate cuts,” he said.
“The central bank is a puppet of the government at the moment, inflation is running at 20% year-on-year and you have Erdogan at the controls, which means that even at 12.75 we are likely not even close to done with this move yet.”
Craig Erlam, an analyst at currency trader Oanda, said: “This is the reality of Erdoğanomics and the results are there for all to see. Sky-high inflation and a currency that’s fallen more than 30% against the dollar since the start of September. Another disastrous experiment at blurring the divide between poor politics and weak monetary policy.”
