Turkey’s interest rate is too high and must come down according to President Recep Tayyip Erdogan who, fresh off an electoral defeat in the mayoral race in Istanbul, claimed that continued high-interest rates could stunt further investment and job growth in the country.
The Turkish government is once again defying calls to allow for an independent monetary policy, calling for lower interest rates. “Unfortunately, in my country, the policy rate is 24%,” Erdogan said, reiterating his widely discredited belief that high inflation is linked to high-interest rates.
In 2018. the Turkish lira lost 30% of its value, a phenomenon that was seen in a number of emerging economies including Argentina and Mexico. Given the sharp drop in foreign direct investment, construction, tourism, Turkey’s burgeoning budget deficit, and deep fears by both domestic and foreign investors that Erdogan would continue with his highly criticised habit of direct interfering in monetary policy has caused the lira to continue to freefall.
The lira’s devaluation has caused a surge in inflation that peaked at 25% and deescalated to 18.7% in May. Inflation was tamed when the Central Bank of Turkey hiked interest rates in autumn 2018, against Erdogan’s orders.
Erdogan noted that both the US Federal Reserve and the European Central Bank are moving towards reducing interest rates, but he failed to mention that the rate of inflation in the US and the Eurozone is well below 2%.
Turkey is the largest economy in the Middle East but is also closely tied to the European economy. On 21 June, Moody’s credit rating agency downgraded Turkey pointing to a heightened risk of government default due to the balance of payment risks.
Moody’s followed in the footsteps of Standard & Poor’s and (B+) and Fitch Rating (BB) by downgrading Turkey’s sovereign risk profile, which is slipping further into “junk” territory. Turkish debt is now well below investment grade, which means that international institutional investors need to stay clear of its government bonds.
Turkey’s finance ministry noted that Moody’s decision “does not conform with the Turkish economy’s fundamental indicators and thus creates question marks about the objectivity and impartiality of the institution’s analyses.”