Turkish lira hits record high after Erdogan renews call for rate cuts

Customers stand near the desk of a currency exchange office in Ankara, Turkey on February 5, 2021.

ADEM ALTAN | AFP | Getty Images

The Turkish lira hit an all-time low on Wednesday, triggered by President Recep Tayyip Erdoan’s call for lower interest rates in the country where inflation is above 17%.

The battered currency fell as low as 8.88 per dollar, a drop of 4%, later recouping some losses to trade at around 8.59 as markets closed in Istanbul.

Speaking to Turkish state television on Tuesday evening and referring to a discussion with his recently appointed central bank governor, Erdogan said: “I even spoke to the central bank governor today – we certainly have to lower interest rates. For that we have to see July, August for interest rates to start going down. ” He added that lower rates would ease the pressure on investments.

The comments sent more nervousness to Turkish markets, making the already weak pound even more vulnerable. Investors worry about the central bank’s lack of independence from Erdogan, who has said interest rates are “the devil” and has the unconventional belief that cutting them will lower inflation – the opposite of what most economists say.

Turkish President Tayyip Erdogan makes a statement after a cabinet meeting in Ankara, Turkey on May 17, 2021.

Murat Cetinmuhurdar | Reuters

“If we remove the burden of interest rates from investments and costs, then we will enter a calmer environment because it is interest rates that cause cost inflation,” Erdogan said.

With inflation stuck at double digits for more than three years now, investors and analysts generally agree that Turkey needs to keep rates high to keep prices from spiraling out of control. Imports and many commodities are much more expensive for ordinary Turks than they were a year ago; at the same time last year, a dollar bought about 6.8 liras. Now he is buying close to 8.6.

The remark was just the latest in a series of comments, political maneuvering and political decisions by the Turkish president that raised fears among investors and weakened the pound.

But Turkish central bank governor Sahap Kavcioglu – the fourth central bank chief hired in two years after Erdogan was sacked of the first three – reportedly contradicted the comment. According to two unnamed sources quoted by Reuters, Kavcioglu told investors that talk of early rate easing was “insignificant” and that inflation would subside in the third or fourth quarter of this year.

The central bank was not immediately available for comment when contacted by CNBC.

“Already significant external vulnerabilities”

It remains to be seen whether these assurances will hold; analysts watching the country are not convinced.

Yesenn El-Radhi, senior sovereign analyst at Capital Intelligence Ratings, cited “several reversals” in Turkey’s monetary policy in recent years and what he saw as “weak autonomy” of the central bank.

Erdogan’s demand for cut rates will exacerbate the country’s “already significant external vulnerabilities” and further hurt investor sentiment, he told Reuters on Wednesday.

Citi also forecast “further losses” for the currency due to a higher risk of inflation and a rapidly depleting currency supply, in part due to more expensive imports and the strategy of the currency. central bank to sell dollars to support the lira.

So far, Kavcioglu has kept Turkey’s key interest rate at the high 19% level to which his predecessor Naci Agbal had raised it. It is widely suspected that Kavcioglu was hired for his tendency to agree with Erdogan’s monetary policy views.

From Erdogan Agbal shot in mid-March, read it lost 16% of its value.

Experts monitoring the country seem just as baffled as many investors are about Wednesday’s comments.

“I don’t know what people are supposed to believe,” said Timothy Ash, emerging markets strategist at Bluebay Asset Management.

“Erdogan is doing an interview yesterday and says he spoke to Kavcioglu and that the rates will go down from July and August. Kavcioglu is now going against the boss, saying there is no early cut?”

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