Erdogan attacks interest rate hikes; lira drops

President Recep Tayyip Erdoğan on Friday said that he was against raising interest rates, and that rates should be cut to slow inflation.

Erdoğan said he was against high interest rates “whether they listen or not”.

The Turkish lira dropped to about 9.10 to the euro, and to 7.45 per dollar. Before Erdoğan made these remarks to a business group in Istanbul, the lira had been as low as 8.95 to the euro.

“Interest rates are directly correlated with inflation and it is important to cut them to reduce inflation, Erdogan insisted. “I need investment, I need employment, I need production, I need exports,” Erdogan said. “If I don’t have these four things, then there is nothing.”

The remarks seem in contradiction with policies of the Turkish central bank under its new governor who has twice hiked interest rates in the past two months, bringing them to 17 per cent from 10.25 per cent.

Foreign investors reacted to the interest rate hikes by adding $1.4 billion to local stocks and $2.5 billion to local bonds in the last two months of 2020, after they had withdrawn more than $13 billion in stocks and bonds through the first 10 months of the year, according to data from Turkey’s central bank. Turkey’s benchmark stock index, the Borsa Istanbul 100 rose more than 10 per cent over the past month and more than 70 per cent from its low last year.

But many analysts warned that Erdogan might not tolerate further interest rate increases, as he has intervened in central bank policy in the past. His remarks are certain to affect foreign investors, who had begun to find the reversal of previous monetary policy credible.

An announcement of structural reforms intended to boost the economy is expected at the end of January, but it is not clear how extensive the proposals will be.

Inflation in Turkey has continued to rise to 14.6 per cent in December, and some Turks are now stockpiling basic food stuffs, including baby biscuits, rice and pasta, after inflation accelerated, Reuters reported earlier on Friday.