Erdogan: ‘We must reduce interest rates;’ Turkish lira at 10.50 to euro

The Turkish lira hit record lows against the euro and the dollar as Turkish President Recep Tayyip Erdogan told the press on Tuesday that interest rates must be cut.

The lira was 10.50 to the euro, and reached at one point a record 8.7 to the dollar after Erdogan’s announcement.

These remarks are carefully timed: The Turkish Statistics Authority (TurkStat) will tomorrow announce the latest rate for inflation. Last month, the rate reached 17.14 per cent.  Reducing the interest rate would cause the currency to fall further, and inflation would worsen.

The high rate of inflation has made food and necessities unaffordable to a large part of the Turkish population, of which about one third is living below the poverty line.

The next meeting of the central bank’s monetary policy committee will be on June 17. A rate cut is expected by most analysts at that time.

“The economy would be more vulnerable to capital outflows, lira depreciation and higher inflation if there was another further easing of Turkey’s positive real benchmark interest rate of 1.6 per cent,” comments Dennis Shen, lead analyst for Turkey at Scope Ratings.

“Deterioration in the value of the lira not only raises inflation, but also undermines debt sustainability given 50 per cent of Turkey’s central government debt is denominated in foreign currency, up from 27 per cent in mid-2013,” says Shen.

“Unless the authorities reverse policy missteps, growing domestic loss of trust in the currency risks structurally higher inflation and balance of payment problems longer-term,” he added.