Turkish lira falls to historical lows due to Erdogan’s call for interest rate cuts | Business and Economic News


He frequently called for interest rate cuts and the removal of three central bank governors, which put Turkey under greater financial pressure.

Turkish President Recep Tayyip Erdogan called for interest rate cuts in the next two months and stated that he had a conversation with the new governor of the central bank on this, pushing the Turkish lira currency exchange rate to a record low .

Erdogan said in a television interview with the national broadcaster TRT Haber late on Tuesday: “I support the same proposition on this issue-I even talked to the governor of the central bank today-of course we need to lower interest rates. .​​” “For this, we need to see interest rates start to fall in July and August,” he said, adding that lowering interest rates will reduce the burden of investment.

The Turkish leader’s remarks are part of a longer explanation of his unorthodox view that lowering borrowing costs will help slow inflation, which is different from the view of most central bankers around the world. Erdogan said that interest rate cuts will reduce costs for producers and ultimately lead to a slowdown in consumer price increases.

Erdogan said: “If we remove the burden of interest rates from investment and costs, then we will enter a calmer environment, because first, interest rates cause cost inflation.”

Damaged reputation

Erdogan’s frequent calls for lower borrowing costs and the sudden removal of three central bank governors in less than two years have weakened Turkey’s currency credibility and made it more vulnerable to high inflation and financial crises.

On Wednesday at 05:27 GMT, the currency exchange rate against the US dollar was 8.63.

Since mid-March, Erdogan, who calls himself the “enemy of interest rates,” has dismissed a tough and respected central bank governor and appointed a like-minded critic of austerity. Since mid-March, It has fallen by 16%.

Since then, the new bank governor Sahap Kavcioglu has kept the policy rate unchanged at 19%, but analysts expect a rate cut in the third quarter. The inflation rate has risen to more than 17%, and the currency devaluation has increased price pressure through Turkey’s large imports.

Central bank leaders are scheduled to hold a conference call with investors later on Wednesday to discuss policy and economic prospects.

A foreign investor said: “Erdogan’s intervention in discussing interest rate cuts late at night is obviously not helpful for Kavsioglu to answer investor calls.”

The currency was hit hard again last week due to concerns about global inflation and Turkey’s early elections.

Turkey, which relies on foreign exchange income from the tourism industry to support its current account deficit, is likely to lose its peak season again this year due to the large number of COVID-19 cases and the restrictions imposed by many countries on travel.

“Unfortunately, the prospect of a central bank rate cut has caused the Turkish lira to fall sharply,” Robin Brooks, chief economist at the Institute of International Finance, said on Twitter. “The drop in the lira means that financial conditions are tightening and growth is slowing.”


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