May 15 2018

Lira hits record low as Erdoğan vows policy control

Turkey’s lira hit a fresh record low against the dollar on Tuesday after President Recep Tayyip Erdoğan said he would take more control over monetary policy.

The lira traded as weak as 3.9842 per dollar, taking losses for the year to more than 15 percent. It fell 0.3 percent to 4.3804 at 8:52 a.m. in Istanbul.

Erdoğan, in an interview with Bloomberg, said the central bank would need to heed his calls for lower interest rates following presidential and parliamentary elections on June 24. The lira has slid against all major currencies in the past week after the central bank failed to raise rates to tame the currency’s decline and rein in inflation, which has accelerated into double digits.

Cutting interest rates would lower inflation, Erdoğan reiterated in an interview with Bloomberg late on Monday, contradicting conventional economic theory and central bank policy around the world.

“Of course our central bank is independent,” Erdoğan said. “But the central bank can’t take this independence and set aside the signals given by the president, who is the head of the executive. It will make its decisions according to this.

“When the people fall into difficulties because of monetary policies, who are they going to hold accountable?” he said. “Since they’ll ask the president about it, we have to give off the image of a president who is influential over monetary policies.”

Erdoğan’s government has stimulated the economy with a host of measures including tax cuts, loan guarantees, pension hikes and investment incentives to spur growth. The economy expanded more than 7 percent last year, the fastest pace in the G-20 group of industrialised nations, but economists, ratings agencies and the International Monetary Fund say the policies are overheating the economy and risk causing a hard landing,

On May 8, Erdoğan said the lira was under attack, claiming there was no technical or rational reason why it was losing value. Erdoğan plans to centralise economic decision-making after the election, including shuttering some automomous institutions or bringing them under the control of ministries, Dunya newspaper reported earlier this month. 

Erdoğan, who graduated from Istanbul’s Marmara University in business management, is set to introduce a full presidential system of government, abolishing parliamentary democracy, should he win the election on June 24. He is ruling by presidential decree under emergency rule introduced following a failed military coup in July 2016.

Turkey's inflation rate has accelerated to 10.9 percent, more than three times the average in emerging markets. As a result, interest rates that banks charge on loans have surged to as high as 20 percent, curbing demand and making it more difficult for Erdoğan to create more economic growth ahead of the elections.

Erdoğan, 64, has vowed to make Turkey's $850 billion economy one of the world's top 10 largest economies by the country's centenary in 2023. That would mean it would need to almost triple in size.