Erdogan says he will keep battling interest rates, hitting lira

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ANKARA – Turkish President Tayyip Erdogan said on Wednesday he will continue his battle against interest rates “to the end”, sending the lira currency to new depths a day before the central bank is expected to slash rates further.

In comments that chopped the currency’s value by as much as 1.5%, Erdogan said he would lift the interest rate burden from people and urged businesses to invest, hire and raise exports.

Investors have fled Turkey in recent years and the currency is by far the worst performer in emerging markets.

They say Erdogan – who has long described himself as an enemy of interest rates – has swayed monetary policy with his frequent calls for stimulus and his rapid overhaul of the central bank’s leadership.

A day before a central bank policy meeting at which it is expected to ease again, the president repeated his unorthodox view that higher rates were the cause of inflation and questioned why some of our “friends” defended tight policy.

“We will lift this scourge of interest rates from people’s backs. We certainly cannot allow our people to be crushed by interest rates,” he told lawmakers from his ruling conservative AK Party in parliament.

“I cannot and will not stand on this path with those who defend interest rates,” Erdogan said.

In response, the lira touched a new all-time low of 10.565, adding to steep losses after what analysts have called premature and risky monetary easing. The currency later rebounded a bit but is down nearly 30% so far this year.

The central bank has bucked expectations and cut its policy rate by 300 basis points since September, even as inflation climbed to near 20%, delivering the stimulus long sought by Erdogan.

Lira timeline
Lira timeline

The central bank says price pressures are temporary. It is expected to cut rates by another 100 basis points to 15% on Thursday, according to a Reuters poll.

In the past, Erdogan has not shied from commenting on monetary policy ahead of central bank meetings, often moving markets. The lira has shed some 64% since the end of 2017 in part due to tattered central bank credibility.

As he left parliament in Ankara, Erdogan said the central bank would decide on rates independently when its monetary policy committee meets at 1100 GMT on Thursday.

Turkey rates and inflation
Turkey rates and inflation

Piotr Matys, senior FX analyst at In Touch Capital Markets, said cutting rates on Thursday would be too risky with the lira under pressure, and he predicted no policy change.

“In order to stabilise the lira, the bank would have to reverse those 300-basis-point cuts since September but I think that the bar for it to make a U-turn is still set fairly high,” he said.

“Tomorrow’s meeting could prove the most important for (Central Bank Governor Sahap) Kavcioglu. Allowing the lira to fall at such a rapid pace will cause serious damage to the Turkish economy,” Matys added.

The lira’s depreciation stokes prices via Turkey’s heavy imports, and also raises default risks for companies with foreign currency debt. The depreciation combined with inflation has meanwhile eaten into Turks’ earnings.

Erdogan, who appointed Kavcioglu in March, also questioned why business people did not take out loans and invest as rates were lowered in the last few months.

“Then they get together (and) talk about high interest rates,” he said, referring to the main business group TUSIAD and others.

“What type of people are you? If you are a businessman you are on the side of investment, so here are you go: loans with low interest,” Erdogan said, adding he expected them to raise investment, employment, exports and production.

Reuters

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