Turkey’s lira dropped against the dollar on Thursday after Turkish President Recep Tayyip Erdoğan called for an interest rate cut by the central bank to bring down double-digit inflation.
The lira was trading down 1.1 percent at 8.56 per dollar at 9:35 a.m. local time.
“We go into a decrease in interest rates once and there is no high interest rate any longer,” Erdoğan told local news channel AHaber in an interview late on Wednesday. “Because high interest will bring us high inflation, but low interest will bring low inflation. August is the breaking point, and with August, we will hopefully move to low inflation.”
At the start of June, Erdoğan called for a rate cut in July or August, saying lower borrowing costs were needed to slow inflation, a view that contradicts with conventional economic theory. He has replaced three central bank governors in just over two years, most recently in March, when he brought in academic Şahap Kavcıoğlu for Naci Ağbal, a former finance minister who had hiked rates to 19 percent from 10.25 percent during his four-month tenure.
The central bank has kept its benchmark interest rate at 19 percent since Kavcıoğlu’s arrival despite an uptick in inflation, which accelerated to 18.95 percent in July from 17.5 percent the previous month. Kavcıoğlu has pledged to keep rates above inflation, but has declined to say whether he would raise borrowing costs if needed. The producer price inflation rate has climbed to 44.9 percent.
“Usual non sensical comments from Erdoğan on interest rates. The lira performs better when he stays quiet on the subject. Can someone give him the message? High interest rates do not cause inflation. Erdoğan is wrong, wrong, wrong,” said Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London.
The central bank’s Monetary Policy Committee is due to meet on interest rates next Thursday.
Ahval