ANKARA: The Turkish lira fell again to a new low early Wednesday, losing 0.6 percent of its value and reaching a low of 8.88 lira against the US dollar after President Recep Tayyip Erdogan expressed his willingness to cut rates on Jan. June announced.
The decline is alarming in a country already facing significant financial pressures, partly due to the coronavirus pandemic, as the lira’s credibility is damaged and Turkey is vulnerable to external shocks.
Erdogan raised concerns about the autonomy of Turkey’s Central Bank (CBRT) and said he had spoken to the newly appointed CBRT governor about rate cuts. “For that we’ll get to around July and August so rates can go down,” he said.
In the past two and a half years, Erdogan has replaced four CBRT governors. Naci Agbal, a notable figure and a pro-market governor, was ousted in March after raising rates in response to global markets. On May 25, Erdogan also deposed one of the four deputy governors of the CBRT.
The current governor, Sahap Kavcioglu, has kept rates steady at 19 percent and resisted Erdogan’s pressure to cut them.
“We’ve seen all of this before. Investors don’t want to see another early rate cut, especially if inflation is persistently high, but most would not have been surprised by Erdogan’s comments, ”Wolfango Piccoli, co-president of Teneo Intelligence in London, told Arab News.
The sudden change in the exchange rate of the lira, which is still one of the worst performing currencies in emerging markets, was a direct response to recent remarks from Erdogan who believes that any rate cut will lower producer costs and lower consumer prices.
On Thursday, the Turkish authorities will announce updated inflation data, which currently stands at 17 percent.
CBRT authorities held talks with investors and some overseas experts on Wednesday to add credibility to the country’s economic prospects.
“Erdogan has supported the argument that high interest rates fuel inflation, despite conventional economic theory suggesting the opposite. A number of central bankers had to deal with it and mostly had to submit monetary policy to Erdogan’s will, ”said Piccoli.
The president’s ruthless interest rate comments also reflect the institutional degradation Turkey has faced for years. The CBRT was one of the main victims of this process, said Piccoli.
According to the latest official statistics, the number of people borrowing from banks has reached 34.5 million, while this year about 2.3 million people took out borrowing for the first time, particularly consumer credit and credit card spending, with suicide rates amid financial strain.
Daron Acemoglu, an economist at the Massachusetts Institute of Technology (MIT), recently called on the Turkish government to stay away from the CBRT and underlined the importance of monetary independence.
“It is accepted all over the world that the CBRT needs autonomy. There should be no monetary policy based on instructions from the prime minister or president. If you do this, there will be no foreign capital, ”said Acemoglu.
He also expressed concern about a possible worsening of the current economic crisis in Turkey.
Nikolay Markov, senior economist at Pictet Asset Management in Switzerland, said Erdogan is focusing on interest rates as the current cost of borrowing in the Turkish economy is too high and has curbed domestic demand, which is one of the main pillars of growth.
“The economy definitely needs lower interest rates for its credit-based model to work properly and stimulate GDP growth, which is currently not possible due to the still very high headline and core inflation and heightened inflation expectations,” he told Arab News.
Markov believes that the CBRT is now back on price stability and, despite the president’s recent remarks, will not cut rates in the very short term, and only when the disinflation process is over, not before summer.
“Kavcioglu is trying to regain CBRT credibility that was lost after Governor Agbal was fired in March. The implication for investors is still complicated as offshore investors are still not convinced of the full commitment of the CBRT to price stability as they still believe that the CBRT is dependent on political pressure from the president, ”he said.
According to Markov, this will also lead to market and lira volatility in the period ahead.
“Still, I have the impression that Kavcioglu is basically a hawk and will try to delay the start of the rate cuts as much as possible without offending the president. Overall, I think the earliest possible date for a rate cut is July. A rate cut in June is off the table, ”he said.