Turkish lira extends record low as Erdoğan signals no rate hikes

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Turkey’s lira extended an all-time low on Monday as President Recep Tayyip Erdoğan repeated his opposition to higher interest rates to defend the currency and tackle inflation.

Interest rates, inflation and foreign exchange are key weapons of Turkey’s adversaries, Erdoğan said in comments on Monday.

The lira dropped by 0.4 percent to 7.4647 per dollar in volatile trading. Losses this year total more than 20 percent.

Erdoğan is a vocal opponent of higher interest rates, saying they are inflationary. His views contradict with conventional economic theory. A compliant central bank has spent tens of billions of dollars of its foreign currency reserves this year to defend the lira while keeping its benchmark interest rate at 8.25 percent, below inflation of 11.8 percent.

Investors are concerned that Turkey’s loose monetary and fiscal policies may destabilise the economy. A currency crisis in 2018, sparked by a political crisis with the United States over the detention of a U.S. pastor, was preceded by similar policies that caused the economy to overheat.

“Typically unhelpful comments from Erdoğan – the central bank faces a difficult job managing the FX and Erdoğan’s comments just make this more difficult,” said Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London. “The fear now is a repeat of the 2018 outcome – weaker FX and much higher rates.”

Erdoğan sacked and replaced the central bank’s governor in July last year for failing to lower interest rates, which then stood at 24 percent. He threatened similar reprisals against sitting officials should they fail to support his government’s pro-economic growth policies.

Instead of raising the benchmark rate, monetary policymakers have forced banks to borrow from the central bank through other means, raising their weighted average cost of funding to more than 10 percent from as low as 7.3 percent in July. Investors say the policy is confusing and less effective than a conventional interest rate hike.

The central bank’s low rates policy has coincided with a state bank-instigated borrowing boom by consumers and businesses, which has widened the current account deficit sharply. The central bank’s dwindling foreign exchange reserves now mean it has little firepower to prevent a run on the currency.

The lira has also plumbed a succession of fresh lows against the dollar as relations with neighbouring Greece deteriorated, resulting in military build-ups by both sides. Greece claims Turkey is exploring for natural gas and oil inside its continental shelf, which it says extends beyond its islands just a few kilometres from Turkey.

Turkey extended a navigational notice (Navtex) for the navy escorted Oruç Reis seismic survey ship to operate in contested waters near Greek islands in the eastern Mediterranean until Sept. 25, the Turkish media reported on Monday.

The deadline coincides with a European Union summit that will consider economic sanctions against the country.

Ahval

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