President Tayyip Erdogan repeated his unorthodox economic policy on Saturday, saying interest rates would be lowered further and inflation would fall as a result, days before inflation data for January is announced, adding Turkey’s economic woes would pass.
Embroiled in a currency crisis fueled by the central bank’s move to slash rates by 500 basis points since September as part of an economic model engineered by Erdogan, Turkey saw December inflation soar to its highest level in Erdogan’s 19-year rule.
A Reuters poll on Friday showed it is expected to hit a near 20-year high of 47% in January.
“You know of my battle with interest rates. We are lowering interest rates and we will lower them. Know that inflation will fall too then, it will fall more,” Erdogan told supporters in the Black Sea province of Giresun.
“Exchange rate will stabilize and inflation will fall, prices will fall too, all of these are temporary.”
Cutting rates at a time when Fed is poised to hike them, with a large number of Developing Nations already on monetary tightening mode spells very little interest for Turkish assets. Moreover, if Central Bank rate cuts were to pass through to deposit and loan rates, they will become dangerously inflationary, as well as stimulating a current account deficit through cheaper imports due to rising domestic demand.
Central Bank of Turkey had ceased its loosening cycle in December, pending a thorough review of its monetary policy framework. In its January inflation report, the Bank had announced finishing the review, which amounted to fantastic means of encouraging de-dollarization. After Erdogan’s statements, all chips may be in place for the second leg of the rate-cutting cycle, which according to some AKP insiders will drive the policy rater from 15% to 9%.
Dollar/TL exchange rate in Asian markets didn’t react to Erdogan statements, starting the week at 13.53-54, however famous Turkish economist Ugur Gurses claimed in his lates article that trading desks of state lenders were working three shifts to sell dollars to prevent depreciation of TL.
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