Turkish lira hits record lows after Erdoğan reiterates call for interest rate cuts

Duvar English - Reuters

Turkish President Recep Tayyip Erdoğan's announcement on June 1 that he was working to cut interest rates has pushed the Turkish Lira into record lows. 

“I spoke with our central bank governor today. It’s imperative that we lower interest rates. For that, we will reach July and August thereabouts so that rates can begin to fall,” Bloomberg quoted Erdoğan as saying. 

The lira subsequently dipped around three percent against the greenback, Bloomberg noted, adding that the exchange rate reached 8.8 liras on the dollar in the early hours of June 2. 

Bloomberg noted that the dramatic shift in the exchange rate came "following the remarks by Erdoğan, who holds the unorthodox belief that lower borrowing costs will help slow inflation, unlike what most central bankers around the world think."

The president thinks that "cutting interest rates will lower producers’ costs and eventually result in slower increases in consumer prices," Bloomberg noted.

However, "premature rate cuts in the past resulted in a weaker lira, which eventually pushed consumer prices higher, forcing the monetary authority to undo rate cuts with even bigger hikes," it said. 

Turkey's lira is one of the worst-performing emerging market currencies this year, down around 13% against the dollar and the euro, as government actions have raised questions about the central bank's autonomy. Erdoğan has replaced four central bankers in the last two months, with the ouster of hawkish chief Naci Ağbal in March dealing a severe blow.

The bank is now functioning under its third governor in the past two years and has held interest rates stable for two consecutive meetings now.

Erdoğan's June 1 comments raise the stakes ahead of calls later in the day between central bank leaders and investors to discuss policy and economic prospects.

"Thursday's [June 3] inflation data will now prove even more important to FX markets, given the increased political pressure to lower rates at a time when markets are skeptical that the central bank would raise rates to begin with should inflation overshoot," said Ima Sammani, an FX analyst at Monex Europe.

"At present, there is no necessity for rates to be lower as President Erdoğan has given the central bank until August to promote the disinflationary channel, but the comments themselves will naturally cause jitters in FX markets."

Missing funds

The president also commented on the main opposition's insistent awareness campaign about the $128 billion that went missing from the central bank's FX reserves during Treasury and Finance Minister Berat Albayrak's tenure. 

"They keep asking 'Where did the 128 billion go?' You don't ask the central bank where its money went, do you now?" the president said. "Nobody asked why we made all this spending for the disasters we went through."