The Turkish lira continues to fall as Erdogan vowed to “not back down” to cut interest rates

The Turkish lira continues to fall as Erdogan vowed to “not back down” to cut interest rates

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After President Recep Tayyip Erdogan rejected the business community’s warning about the danger of a recent interest rate cut and vowed that his approach “will not look back,” the Turkish lira continued to fall in free fall.

Since Erdogan ordered the central bank to reduce borrowing costs in September, the currency’s exchange rate against the U.S. dollar has fallen by 50%. After the market opened on Monday, the exchange rate against the U.S. dollar fell to a new low of 17.5. The lira fell by more than 6%, much worse than the 0.2% drop in the MSCI Emerging Market Currency Index.

There is growing concern about the impact of currency depreciation on the health of the broader financial system, and the cost of preventing Turkish debt defaults has soared. IHS Markit data compiled by Refinitiv shows that the spread of five-year credit default swaps has risen from about 300 basis points at the beginning of the year to 575 basis points.

Despite rising inflation, Erdogan insisted on cutting interest rates four times in the past four months, which plunged his country of 83 million people into a currency crisis. As other central banks in the world try to raise interest rates to fight price instability, this is inconsistent with the world. The trend runs counter to. Rate.

The Turkish President refused to accept the economic orthodoxy that raising interest rates would help resolve inflation and dismissed the business community’s warnings about the dangers of his practices.

“Don’t expect anything from me,” he said in a televised speech on Sunday night. “As a Muslim, I will continue to do whatever religious laws require,” he added, referring to Islam’s prohibition on loan sharking.

Earlier in the day, he also refuted the suggestion that he might be forced to implement capital controls to stop the currency plummeting, calling the idea “ridiculous.”

The President of Turkey has stated that the country is seeking a “new economic model” that will use low interest rates and a competitive currency to promote exports, investment and employment.

Economists warn that this will cause uncontrolled inflation and dangerous financial instability in a country that relies heavily on foreign financing.

The official annual inflation rate reached 21% in November, and economists expect the inflation rate to rise further in the coming months as the weak lira quickly pushes up prices, especially considering Turkey’s heavy use of imported energy and raw materials.

In his speech on Sunday night, Erdogan acknowledged the public’s concerns about price spikes, but described these issues as temporary — and regarded them as part of the nation’s struggle for economic independence.

“Of course, we know that rising prices have brought problems to our people’s daily lives. Of course, we are aware of exchange rate fluctuations, price instability, and the uncertainty that comes with it,” he said.

“But we will resist these, just as we resist guardians, terrorist organizations, coups and global power tycoons. I tell you, we can’t go back.”

He attacked Tusiad, the country’s largest business association, which on Saturday urged the government to return to “established economic and scientific rules” to restore stability and prevent further damage to businesses and the public.

“Hey Tusiad and your offspring,” he said. “I tell you, you only have one job: investment, production, employment, growth… You cannot interfere with what we are doing.”

The day before, the head of the Turkish Chamber of Commerce and Commodity Exchanges Union (TOBB), which represents SMEs and has supported Erdogan’s approach in the past, warned that financial turmoil was “worrisome and had a negative impact on many people”. our company”.

TOBB President Rifat Hisarciklioglu called on the government to take “emergency measures” to stabilize the market and restore a more predictable business environment.

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