Erdogan says Turkey will continue to cut interest rates, mocks sterling

Turkish President Tayyip Erdogan addresses members of his ruling AK Party (AKP) during a parliament meeting in Ankara, Turkey, on May 18, 2022. Murat Cetinmuhurdar/Presidential Press Office/Handout via REUTERS ESTA IMAGE HAS BEEN SUPPLIED BY A THIRD PARTY. NO RESALES. NO FILES. MANDATORY CREDIT

Murat Cetinmuhurdar | Reuters

Turkey will continue to cut interest rates, its president Recep Tayyip Erdogan said, despite inflation soaring to more than 80%.

Turkey’s central bank will not raise rates, it told CNN Turk on Wednesday night, adding that it expects the country’s key rate, currently 12%, to reach single digits by the end of this year.

Faced with deepening economic problems, Erdogan also took the time to hurl some criticism at the UK, saying sterling has “exploded”.

The UK currency recently hit an all-time low against the US dollar at around $1.03 as the new Conservative government led by Prime Minister Liz Truss unveiled an economic plan, based largely on loans and tax cuts. despite rising inflation, which sent the markets reeling.

It has drawn alarmed reactions from US economists, lawmakers and the International Monetary Fund, with some saying the UK is behaving like an emerging market.

Turkish Lira, meanwhile, hit a record low of 18,549 against the dollar on Thursday. The currency has lost roughly 28% of its value against the dollar this year and 80% in the last 5 years, as markets rejected Erdogan’s unorthodox monetary policy of cutting interest rates despite high inflation. .

“Oh the irony, Erdogan giving Truss advice on the economy,” Timothy Ash, emerging markets strategist at BlueBay Asset Management, said in an email note.

“Turkey has 80% inflation and I think it’s the worst performing currency in the last decade. Lol. How low the UK has sunk.”

People browse gold jewelry in the window of a gold shop at Istanbul Grand Bazaar on May 5, 2022 in Istanbul, Turkey. Gold prices rose on Monday as the dollar hovered near recent lows, with investors focused on a key US inflation reading as it could influence the size of the next US rate hike. Federal Reserve.

Burak Kara | Getty Images News | fake images

Erdogan doubled down on his controversial monetary plan on Thursday, saying he told central bank decision-makers to continue cutting rates at their next meeting in October.

“My biggest battle is against interest. My biggest enemy is interest. We lowered the interest rate to 12%. Is that enough? Not enough. This needs to be lowered further,” Erdogan said during an event, according to a report. from Reuters. translation.

“We have discussed, we are discussing this with our central bank. I have suggested the need for this to be reduced further in the next monetary policy committee meetings,” he added. central bank of turkey shocked the markets with two consecutive cuts of 100 basis points in the past two months, as many other major economies seek to tighten policy.

Meanwhile, the lira is expected to fall further as Turkey prioritizes growth over fighting inflation, which is at its highest level in 24 years. In addition to the skyrocketing costs of living this has caused for Turkey’s population of 84 million, the country is burning through its foreign exchange reserves and running a widening current account deficit.

As the US Federal Reserve raises its interest rate and the dollar strengthens, Turkey’s many dollar-denominated debts and the energy it imports in dollars will become increasingly difficult to pay.

“With external financing conditions tightening, risks remain firmly skewed towards sharp and disorderly falls in the lira,” Liam Peach, senior emerging markets economist, wrote in a note after Turkey’s latest rate cut on June 22. September.

“The macroeconomic environment in Turkey remains poor. Real interest rates are deeply negative, the current account deficit is widening, and short-term external debt remains high,” he wrote. “It may not take a significant tightening of global financial conditions for investors’ risk sentiment towards Turkey to sour and add further downward pressure on the lira.”

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