Turkish President Tayyip Erdogan addresses members of his ruling AK Party (AKP) during a meeting at the parliament in Ankara, Turkey, May 18, 2022. Murat Cetinmuhurdar/Presidential Press Office/Handout via REUTERS THIS PICTURE WAS PROVIDED BY A THIRD PARTY. NO RESALE. NO ARCHIVES. MANDATORY CREDIT
Murat Cetinmuhurdar Reuters
Turkey will continue to cut interest rates, its President Recep Tayyip Erdogan said, despite rising inflation of over 80%.
Turkey’s central bank will not raise interest rates, he told CNN Turk on Wednesday night, adding that he expects the country’s benchmark interest rate, currently 12%, to reach single digits by the end of this year.
Amid deepening economic woes, Erdogan also took the time to throw a few barbs at Britain, saying the British pound had “exploded”.
The British currency recently hit an all-time low against the US dollar at nearly $1.03 as the new Conservative government led by Prime Minister Liz Truss unveiled an economic plan – which relied heavily on borrowing and tax cuts despite rising inflation – that spurred markets brought to falter.
It has prompted alarmed reactions from US economists, policymakers and the International Monetary Fund, with some saying the UK is behaving like an emerging economy.
The Turkish lira hit a record low of 18.549 against the dollar on Thursday. The currency has lost about 28% of its value against the dollar this year and 80% in the last 5 years as markets avoided Erdogan’s unorthodox monetary policy of cutting interest rates despite high inflation.
“Oh, the irony, Erdogan is giving Truss advice on the economy,” said Timothy Ash, an emerging markets strategist at BlueBay Asset Management, in an emailed note.
“Turkey has 80% inflation and I reckon the worst performing currency in the last decade. lol How low Britain has sunk.”
People browse gold jewelry in the window of a gold shop at Istanbul Grand Bazaar on May 05, 2022 in Istanbul, Turkey. Gold prices rose on Monday as the dollar fluctuated near recent lows, with investors focused on a key US inflation rate as it could influence the size of the Federal Reserve’s next rate hike.
Burak Kara | News from Getty Images | Getty Images
Erdogan doubled down on his controversial monetary plan on Thursday, saying he had told central bank policymakers to cut interest rates further at their next meeting in October.
“My biggest fight is against interest rates. My biggest enemy is interest rates. We have lowered the interest rate to 12%. Is that enough? It’s not enough. That needs to be lowered further,” Erdogan said, according to Reuters during an event translation.
“We have discussed this with our central bank, are discussing this. I have suggested that this needs to be addressed further in upcoming Monetary Policy Committee meetings,” he added. Turkey’s central bank shocked markets with two consecutive 100 basis point cuts over the past two months as many other major economies seek to tighten monetary policy.
The lira, meanwhile, is likely to fall further as Turkey prioritizes growth over fighting inflation, which has hit its highest level in 24 years. Adding to the skyrocketing cost of living this has entailed for Turkey’s 84 million people, the country is burning up its foreign exchange reserves and running a growing current account deficit.
If the Federal Reserve raises interest rates and the dollar strengthens, paying off Turkey’s many dollar-denominated debts and the energy it imports in dollars will become even more painful.
“As external financing conditions tighten, risks remain highly distorted, leading to a sharp and disorderly decline in the lira,” Liam Peach, a senior emerging market economist, wrote in a note following Turkey’s latest rate cut on Sept. 22.
“The macroeconomic backdrop in Turkey remains poor. Real interest rates are deeply negative, the current account deficit is widening and short-term external debt remains high,” he wrote. “It may not take a significant tightening in global financial conditions for investor risk sentiment towards Turkey to fade, putting further pressure on the lira.”