The Turkish currency weakened by some 10% against the U.S. dollar Tuesday, a day after President Recep Tayyip Erdogan insisted there would be no turning back from his unconventional policy of cutting interest rates despite high inflation.
The lira plunged to a record low of 13.44 against the dollar before recovering some of its losses. It was trading at 12.51 against the dollar in the late afternoon – down 9.9% from Monday’s close – and at 14.08 against the euro. The lira has lost some 40% of its value since the start of the year.
Erdogan, who had declared himself an “enemy” of high borrowing costs, portrayed his economic policies as “an economic war of independence” during a late-night televised address to the nation. He made clear that his government would not step back from its policy of lowering borrowing rates to boost growth.
Contrary to traditional economic theory, Erdogan argues that high interest rates cause inflation. Typically, central banks raise those rates to tame rising consumer prices.
“Either we were going to give up on investments, production, growth and employment by keeping to the understanding that has prevailed in our country for years, or we were going to engage in a historic struggle in line with our priorities,” Erdogan said. “As always, we preferred the struggle.”
“We are determined to do the right thing for our nation,” he continued. “We encourage investment, production and exports … We protect employment … We care about growth.”
Turkey’s Central Bank has cut interest rates by 4 percentage points since September, raising concerns about its independence from Erdogan’s government. The president has sacked three bank governors since 2019.
Inflation is running at around 20%, eroding the public’s purchasing power.
Dozens of people marched down a busy street in the capital Ankara Tuesday, accusing Erdogan of mismanaging the economy and calling for his government’s resignation, Cumhuriyet newspaper reported.
Ahmet Davutoglu, a former prime minister who broke away from Erdogan’s ruling party and formed his own political movement, called on the Turkish leader to change course.
“Do not continue on this wrongful path, you are harming the country and the economy,” he said, after holding an emergency meeting to discuss the lira’s slump with Kemal Kilicdargolu, the leader of Turkey’s main opposition party.
Kilicdaroglu criticized Erdogan’s apparent sway over the Central Bank.
“The institution which is responsible for price stability cannot bring about price stability. It has become a spectator. Its powers have been taken away,” he said. [AP]