Turkish President Recep Tayyip Erdogan vowed Wednesday to continue fighting for lower interest rates, sending a clear signal to investors a day before the central bank sets its policy. The lira weakened.
Pressured by Erdogan’s demands for lower borrowing costs, the monetary authority has cut the key rate by 300 basis points to 16% in two consecutive and unexpected moves since September, battering the currency, fueling inflation and stoking a property boom. Even before his comments, it was expected to slash its policy rate by a further 100 basis points to 15% on Thursday, according to the median estimate in a Bloomberg survey of 21 analysts.
“I cannot be on the same path with those who defend interest,” Erdogan said in speech at parliament in Ankara. “We will lift the interest rate burden from citizens,” he said, repeating his unorthodox mantra that high borrowing costs are the cause of inflation rather than a brake on price gains.
Erdogan told reporters on Wednesday the central bank would decide its policy independently, amid accusations of intense political pressure on policymaking.
However, not heeding Erdogan’s calls has cost several central bankers their jobs. Sahap Kavcioglu is the fourth governor since 2019, with the president firing his three immediate predecessors and removing committee members who opposed cuts.
Turkey’s lira extended its slide after his speech, weakening as much as 2.4% to a record low of 10.5619 per dollar.
Erdogan’s ruling AK Party has for decades based its electoral success on rapid levels of economic growth, often driven by reducing borrowing costs to encourage credit expansion. When the economy sank during the pandemic, support for Erdogan and his party fell, prompting him to redouble efforts to propel growth.
In Wednesday’s comments, he used Koranic teachings to hit back at critics concerned the easing cycle would exacerbate inflation, which neared 20% last month, hurting his traditionally working class base. “I will continue fighting against interest as long as I continue serving,” he said.
Erdogan’s distaste for higher borrowing costs has also been linked to Islamic proscriptions on usury. In his view, producers have to pass on the interest they pay to customers, so they raise prices.
The recent rate cuts pushed real yields further into negative territory as consumer inflation climbed to an annual 19.89% in October. The lira weakened more than 10% against the dollar this quarter alone, the worst among all major currencies tracked by Bloomberg.