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Categorized | Currencies

Turkish lira falls further as Erdogan calls for interest rate cuts

Posted on November 24, 2016

The Turkish lira drifted lower into uncharted territory after President Recep Tayyip Erdogan repeated his aversion to interest rates ahead of a key Central Bank decision today.

At publication time the lira is down half a per cent to 3.41 per dollar, having fallen as low as 3.4208 this morning. The currency has slid more than 18 per cent in the last year.

Mr Erdogan has consistently demanded lower rates from his Central Bank governors and the country’s private banks as he focuses on growth. Yesterday, at an event involving Islamic Banking, he described interest rated based banking as “a serious dead-end.”

“Turkey’s real interest rate is among the highest in the world. That makes me very uncomfortable… We need to change that,” he said.

I am calling on lenders: please reduce interest rates to reasonable levels. Look at unemployment in the country. If we want growth, we need employment, investment and competition. Unemployment is above 11 percent; is this what this country deserves?

The Central Bank will hold a regularly scheduled policy meeting today, where some investors had expected it to consider increasing the repo rate by either 25 or 50 basis points to arrest the lira’s slide. Those expectations may no longer hold true after Mr Erdogan’s comments.

The drop in the Turkish lira comes as investors around the world prepare for the US Federal Reserve to raise rates, and seek safer assets like the Japanese Yen and gold after the election victory of Donald J. Trump. Mr Erdogan, meanwhile, is faced with the prospect of a third quarter with close to zero GDP growth, and a weak currency that exposes its businesses – which are heavily indebted in dollars – to the risk of defaults. He chaired an economic coordination meeting yesterday focused on the lira’s drop.

Mr Erdogan acknowledged criticism that his demands for lower rates have chipped away at the Central Bank’s independence. A relatively new governor, Murat Cetinkaya, has followed his lead, after a predecessor was repeatedly lambasted as a traitor for keeping rates high.

“Unfortunately, we could not achieve as much as we wanted about the interest issue – I’ve had to criticize the Central Bank for this reason for years. I still criticise,” Mr Erdogan said. “What did they say? “Central Bank” is an independent institution.”

He continued: “Ok, I’m a politician. Do I have authority to interfere officially? No. But if such a thing is being done I will stand and criticise. Because I am the one who is slapped in front of my people.”

Chart: Bloomberg