Turkish lira tumbles but Erdogan continues to defy economic logic on interest rates

Turkey’s lira has tumbled in recent months as President Recep Tayyip Erdogan cuts interest rates despite rising consumer prices.

Erdogan argues that the lira’s weakness is the cost of turning Turkey into a major industrial power and freeing it from a dependence on short-term foreign cash, which flows in when rates are high.

The currency has lost around 40 per cent of its value during 2021 and has been one of the world’s worst-performing currencies.
The lira’s 29-per-cent drop during November, the largest monthly slump since Turkey adopted a floating exchange regime around 20 years ago, is creating price rises and angering voters.

The central bank has cut borrowing costs by four percentage points since September, although inflation rose to around 20 per cent.

The authoritarian Erdogan says high-interest rates cause inflation while most economists say higher increasing rates push down prices.

Erdogan has dismissed three central bank governors since 2019 over differences on interest rates.

“God willing we will stabilise foreign-exchange rates in a short time period,” Erdogan said on Saturday in the eastern city of Siirt. “Interest rates are a malady that make the rich even richer and the poor even poorer.”

Foreign investors have dumped Turkish assets and appear to be concluding the central bank is controlled by an economically illiterate president.

Erdogan appointed a new treasury and finance minister, Nureddin Nebati, on Thursday after Lutfi Elvan resigned amid the drastic inflation.

Nebati was the deputy minister. The Official Gazette said Elvan asked to be “pardoned from the job”.

Energy prices rose 32 per cent last month and 26 per cent in October although Turkey subsidises gas and oil prices for consumers. The global commodity boom caused by Covid has also sent prices rising. Food price rises have far outstripped economists’ forecasts.

Turkish citizens have been converting savings into foreign currencies and buying gold as inflation eats at their assets.

“People bring their savings and always want to buy dollars. When will it end, where will this go? They’re panicking,” said Hulya Orak, a currency exchange employee. “People are constantly in panic mode and are using money that’s under their mattresses”.

Ordinary Turks are feeling the pinch as commodity prices rise. Picture credit: Eurasia Times