The Turkish Central Bank seeks to calm the markets after the deterioration of the exchange rate of the lira


Turkey’s central bank governor sought Wednesday to dispel fears of an early cut in the key interest rate, after a call to that effect by President Recep Tayyip Erdogan led to a further deterioration of the Turkish lira’s exchange rate.

Turkish Central Bank Governor Shihab Kavuoglu stressed during a meeting with investors that unjustified expectations regarding early interest rate cuts must be dispelled, Turkish media reported.

“We will keep the main interest rate at a level above the inflation level (…) until indicators show a sustainable decline” for the latter, Cavusoglu added.

It seems that Cavusoglu is trying, through these statements, to contain the pressures of Erdogan, who called on Tuesday during a television interview with the Central Bank to reduce interest rates as of this summer.

“I spoke with the governor of the central bank,” Erdogan said. It is necessary to reduce rates, they should start reducing them in July-August.”

The comments sparked concern in markets that do not like Erdogan’s pressure on the central bank and fear that lower interest rates will accelerate inflation.

This concern was translated by the decline in the exchange rate of the Turkish lira on Wednesday to its lowest level ever against the green currency, recording 8,6266 lira to the dollar.

Raising interest rates is one of the main ways to combat inflation. In April, Turkey’s inflation rate was 17.14 percent year on year, according to official figures.

However, Erdogan opposes high interest rates and sees them as a dampener on growth. Contrary to classical economic theories, Erdogan believes that raising interest rates leads to higher prices.

Against the backdrop of repeated hikes in the key interest rate, Erdogan in March dismissed Central Bank Governor Naji Iqbal, the former finance minister who enjoys the confidence of economic circles.

Since taking office, Cavusoglu has kept the key interest rate at 19 percent.

Jason Taffey, an economist at the Capital Economics Center, said that regarding Erdogan’s recent statements, “the central bank will soften its monetary policy,” stressing that taking this path is “a matter of time.”

He added, “Reducing interest rates would support economic growth in the short term, but the price would be a higher rate of inflation,” which increases fears in the markets and exacerbates pressure on the Turkish lira.



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