Analysis-In the eyes of the polls, Turkish Erdogan may regret the rate cut he has demanded



By Nevzat Devranoglu, Orhan Coskun and Jonathan Spicer

ANKARA (Reuters) – President Tayyip Erdogan’s belief that a sharp cut in interest rates will boost Turkey’s economy ahead of the election is likely to backfire on high inflation and weaker pound growth.

Sources close to the presidency told Reuters that Erdogan had pushed the central bank for months – both publicly and privately – to put in place monetary stimulus to boost lending, exports and employment despite soaring inflation.

On September 23, the bank kept its promises, unexpectedly lowering its key rate from 100 basis points to 18% – sending the currency to all-time lows.

Investors ditched Turkish bonds and said the move was the final blow 2021-09-23 for the central bank’s shattered credibility, as inflation had jumped above 19% amid global price pressures that leave emerging markets like Turkey particularly vulnerable.

Consumer prices rose 19.6% in September from the same month last year, the largest rate of increase in 2.5 years, data showed on Monday.

In interviews, several Turkish economists said the cut in rates was a serious mistake that would likely plunge Turks further into economic distress ahead of elections due by mid-2023.

“The feeling of gloom, the exchange rate, reveals that economic governance is in ruins,” said Refet Gurkaynak, chairman of the economics department at Bilkent University in Ankara.

Yet Erdogan – slipping in opinion polls – had grown impatient of a rate cut after the installation of a new central bank chief earlier this year, and he was surprised that inflation had risen, two Turkish officials said.

Still, an official close to the presidency said the rate cut was worth it despite the inevitable risks and criticism.

“This move was necessary to increase exports, create jobs and pave the way for new investment,” the person said on condition of anonymity. “There may be negative effects, but you had to take it… to get those benefits. “

The president’s office did not immediately say whether he pushed for the rate cut and why. The central bank declined to comment on whether Erdogan lobbied.

Erdogan, a self-proclaimed enemy of interest rates, said on Friday that inflation would drop to single digits, but he did not mention the cut in interest rates.

His government accused supermarkets of unfair practices, while Erdogan on Sunday promised to open 1,000 new markets across the country to provide “appropriate” prices for goods.


The central bank said easing was needed because inflation is temporary and a base measure has come down, and also because loans suffered after six months of keeping the policy rate at 19% – among the highest in the world. world.

But Turkey’s relatively low foreign exchange reserves, massive imports and a more negative inflation-adjusted “real” interest rate are all warning signs for the currency. Adding to the risks, the depreciation of the pound pushes up inflation.

All of this, combined with high corporate external debt, means exports benefit little from rate cuts, while private banks prefer to cut credit rather than increase credit again, said Gurkaynak, a former economist at the US Federal Reserve.

“If the policy change is based on the belief that it will help economic activity, there are false assumptions,” he said.

Selva Demiralp, director of the Koc University-TUSIAD Economic Research Forum, said Turkey’s “trial and error” policy was reckless as the Fed and other major central banks prepare to tighten policy to avoid inflation, including the recent shock in energy prices.

“The rest of the world has correctly analyzed the Fed’s guidance… but this decision will cause great damage to the Turkish economy,” she said.

Past cycles of Fed policy tightening have drawn funds from Turkey and other emerging market economies.

Benchmark debt yields surged after the rate cut, indicating low confidence in the central bank’s ability to reduce inflation. Nonetheless, money market prices show that traders expect further declines before the policy rate drops to 18% -18.5% in a year.


After a currency crisis in 2018 and massive sales, the pound lost two-thirds of its value in five years, chipping away at the incomes of Turks who also faced double-digit inflation for most of that time.

This alarmed Erdogan, whose conservative AK party ruled for 19 years on a reputation for strong economic growth and household wealth.

But that reputation has rusted somewhat

Polls show the party has 31% to 33% support, up from 42.6% in the 2018 election. Its nationalist ally, the MHP, also slipped, suggesting Erdogan would lose control of parliament in a vote.

Erdogan is weighing heavily on the central bank after sacking his last three governors over political differences. He stepped up the pressure in June when he said he spoke to Sahap Kavcioglu, the current leader, about the need for a rate cut after August.

Even though inflation jumped to 19.25% in August, Kavcioglu began to give conciliatory signals during the September 1 investor appeals, Reuters reported, citing participants. He confirmed in a speech on September 8 that, according to a separate source, the bank hastily decided not to go public until the day before.

Another official with knowledge of the matter said Erdogan was told that a reduction could take place in July or August. When it didn’t, “the president continued to seriously expect rates to be lowered,” the person said.

Erinc Yeldan, acting dean of Bilkent’s economics faculty, said the AK Party was trying to build a new story of economic growth “at whatever cost” ahead of the elections.

“It is clear that the result of these efforts will be even greater instability and a worsening of the forex crisis,” he said.

(Written by Jonathan Spicer, edited by Hugh Lawson)



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