Erdogan says high rates will not get Turkey anywhere as Turkish lira slides

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President Tayyip Erdogan said on Friday high interest rates do not serve Turkey and he repeated his unorthodox view that the solution is to cut rates in order to lower inflation, comments that rattled investors and sent the lira down nearly 2 percent.

Addressing business leaders after a two-month rally in the lira, Erdogan said a stable exchange rate is vital in the fight against inflation, which is near 15 percent and has been mostly in double digits for three straight years.

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In a turnaround in November that drew a rush of foreign investment, Erdogan pledged a new market-friendly economic era even if that meant swallowing “bitter pills” to lower inflation. Since then, his newly appointed central bank chief hiked rates by 675 points to 17 percent.

But on Friday, Erdogan said Turkey should not be proud of high rates at a time that other countries with low rates are getting monetary stimulus amid the coronavirus pandemic.

“We won’t get anywhere with high interest rates,” he said in Istanbul. “Exchange rate stability plays an important role in the fight against inflation, but the real task is to bring inflation down by lowering interest rates.”

A merchant counts Turkish lira banknotes at the Grand Bazaar in Istanbul, Turkey. (Reuters)
A merchant counts Turkish lira banknotes at the Grand Bazaar in Istanbul, Turkey. (Reuters)

“In America and Japan interest rates are zero,” Erdogan added. “Meanwhile we boast about high interest rates.”

Analysts said the comments could signal waning commitment to tight monetary policy that economists see as essential to tame price rises, including annual food inflation of more than 20 percent.

The lira tumbled as far as 7.51 against the dollar and was at 7.4865 at 1513 GMT.

The currency lost 20 percent last year, keeping inflation elevated. But since November, it rebounded 10 percent as some $70 billion in foreign inflows snapped up Turkish assets, seeking yield.

“For a little while the lira was a bit of a market darling,” said Guido Chamorro, London-based fund manager at Pictet Asset Management.

But Turkey’s policymakers still had “quite a lot to prove,” he added. “Longer term it is difficult to be super bullish on Turkey, it still has a lot of challenges.”

Societe Generale analysts recommended bullish bets on the lira earlier on Friday given the pivot “to more orthodox policies.” But they also warned of a risk that authorities may not remain committed to the new reforms.

The central bank holds its next policy-setting meeting on Jan. 21, where it is expected to keep interest rates on hold, according to a Reuters poll.

Istanbul’s main stock index was off 1.4 percent, led by bank stocks, in its sharpest drop of the year while Turkey’s dollar bonds also slid.

Turkey’s finance ministry separately published data showing a budget deficit of 172.7 billion lira ($23.2 billion) in 2020, and a primary deficit of 38.8 billion lira.

Erdogan said Turkey aimed to lower its deficit-to-GDP ratio to 3.5 percent this year.

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