Turkish Lira Remains Under Pressure of Recep Tayyip Erdogan’s Unconventional Monetary Policy Views

October 21, 2021

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Turkish Lira Remains Under Pressure of Recep Tayyip Erdogan’s Unconventional Monetary Policy Views

The governor of the central bank of Turkey, apparently submitting to the orders of President Recep Tayyip Erdogan, who has unorthodox monetary views (if inflation gets higher, he wants the rate to be cut, according to his statements, while the classic economic theory says the opposite) cut the interest rate more than expected despite rising inflationary pressures and the continuing demise of Lira to an all-time low.

The Monetary Policy Committee’s last move was to lower the key weekly repo rate by 200 points to 16%, while the consensus forecast expected Central Bank governor Şahap Kavcıoğlu to continue easing monetary policy after Erdogan spared the monetary authorities from politicians opposing his calls for lower borrowing costs. As a result, Lira continued to suffer losses and traded 2.4% lower to 9.4482 per dollar at the time of writing.

A self-proclaimed "enemy" of high interest rates, Erdogan adheres to the unconventional hypothesis that lowering interest rates will help the economy so much that it will automatically “terminate” inflation. He appointed Kavcıoğlu in March, replacing his hawk predecessor, Nasi Agbal, after consistent rate hikes. Kavcıoğlu remained unchanged for a rather prolonged, under circumstances, period of nearly six months before unexpectedly cutting its benchmark rate by 100 basis points to 18% in September, when consumer inflation accelerated to 19.6%.

The monetary policy committee reshuffle last week pushed the currency to new lows, pushing its losses this year against the dollar to more than 20%, more than any other major currency tracked by Bloomberg. Majority of polled economists and forex analysts, even when predicting rate cuts, argued that the central bank should have raised the rates.

This grim situation continues to act as an embarrassingly humiliating impetus to punish Turkish Lira even further down.