Lira Slides After Erdogan Says Islam Demands Lower Rates
The lira tumbled to another record low and stocks and bonds nosedived after Turkish President Recep Tayyip Erdogan pledged to continue cutting interest rates, referring to Islamic proscriptions on usury as a basis for his policy.
The currency weakened more than 8% to break past 18 per dollar Monday, heading for a fifth day of declines. It’s lost half its value over the past three months, the biggest retreat of any currency in the world over that period. Yields on 10-year lira bonds jumped more than 100 basis points to 23.9%.
“What is it? We are lowering interest rates. Don’t expect anything else from me,” Erdogan said Sunday in televised comments from Istanbul. “As a Muslim, I’ll continue to do what is required by nas,” he said, using an Arabic word used in Turkish to refer to Islamic teachings.
It’s the second time in a month Erdogan has invoked religion to justify the current monetary stance, which is in line with his demands for lower borrowing costs to boost economic growth. The lira’s collapse is the outcome of an economic siege, but Turkey won’t back down from its new economic policy, he said.
The currency has retreated 58% this year versus the dollar, a slump that accelerated last month after Erdogan unveiled an economic model that relies on lower borrowing costs and a cheaper currency.
“Lower real rates, weakening fundamentals and tighter global financial conditions will drive the lira further down” unless Erdogan changes course, Minna Kuusisto and Jakob Christensen, analysts at Danske Bank A/S, wrote in a report published Monday.
The lira was trading at 17.97 per dollar as of 6:48 p.m. Istanbul time Monday. In a sign that the currency woes are starting to seep into other markets, Turkish stocks extended declines Monday. The Borsa Istanbul 100 Index, which has rallied during the currency selloff as locals sought to protect their cash, tumbled as much as 8.2%, prompting two automatic trading halts. The gauge lost as much as 9.1% Friday.
In the eyes of the president, Turkey can free itself from reliance on foreign capital flows by abandoning policies that prioritized higher interest rates and strong inflows. At the heart of his ideas is a belief that lower interest rates will also curb consumer price growth -- the opposite of the consensus view among the world’s central bankers.
He’s put that idea to the test since September when the central bank began cutting interest rates despite soaring consumer prices, culminating on Thursday in another 100 basis-point reduction that left the benchmark rate at 14%. The ensuing monetary stance eventually left the lira unanchored, with the currency sinking to fresh record lows almost every day.
The currency’s collapse fed into consumer prices almost overnight, resulting in inflation so rampant that supermarket employees have been barely able to keep up with changing labels. Working-class Turks and pensioners began forming long lines in front of municipality stalls to get subsidized bread in recent weeks while the country’s top business associations started publicly attacking the government for destabilizing the economy.
“Of course, we know the impact from price increases on people’s daily lives. We are of course aware of the instability caused by the lira’s fluctuations and its impact on prices,” Erdogan said. “But we will put up resistance against these. I announce from here: there is no backing down.”
Erdogan’s most recent policy pivot also drew the ire of Turkish industrialists, with several business associations calling for measures to stabilize the lira’s exchange rate.
Key business group Tusiad -- once the umbrella organization for Turkey’s most powerful businesses -- called on Erdogan’s government over the weekend to abandon the current policy stance, citing recent market turmoil as proof that the experimental model is bound to fail.
Erdogan hit back at Tusiad and others critical of him, warning them that “they won’t be able to challenge the government.”
“You are working to put in power a government that you can exploit. This nation will not allow you to do that,” he said.
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