While much of the world is fixated on Liz Truss’s breathtaking incompetence as now-former prime minister of Britain, Turkish President Recep Tayyip Erdogan is making yet another policy blunder of his own, enflaming inflation even higher after cutting interest rates once again.
Erdogan, who refers to rate hikes as “the mother of all evil,” instructed Turkey’s central bank to cut its key interest rate by 150 basis to 10.5%, even as the country’s inflation rate sits at over 83%. The policy decision surprised markets on Thursday, which although have grown accustomed to Turkey’s unorthodox interest rate reductions, were pencilling in a cut of no more than 100 basis points.
The lira slumped to a new record-low following the news, before flatlining at around 18.6 against the US dollar. Turkey’s currency is down almost 50% to the greenback over the past 12 months, while the country’s account deficit stood at a colossal $3.1 billion, according to data compiled by Goldman Sachs. “My biggest battle is against interest. My biggest enemy is interest. We lowered the interest rate to 12%,” Erdogan said last month as cited by CNBC. “Is that enough? It is not enough. This needs to come down further.”
The Turkish president has been attempting to spur economic growth and competition, under his firmly-held belief that low interest rates increase inflation. “The lira remains weak, real yields are artificially low, inflation has surged and the current account remains in deficit. This has caused international investors to abandon the local currency bond market in Turkey in recent years,” said William Blair Investment Management portfolio manager Daniel Wood.
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