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Lira drops as Erdogan calls for further cut in interest rates

28 May 2014

The Turkish lira dropped to a one-week low as Prime Minister Recep Tayyip Erdogan increased pressure on the central bank to cut interest rates further.

In a statement on Tuesday which market experts said contradicts conventional economic theory, Prime Minister Erdogan said Turkey’s high interest rates were to blame for high inflation and accused the central bank of “failing to bring inflation down.”

Erdogan said on Tuesday the central bank’s interest rate cut last week was not enough and called for more “serious” decisions from the bank. This statement took its toll on the lira, which was one of the world’s worst performing currencies on Tuesday with as much as a 1% loss in value against the US dollar. The lira weakened to 2.1060 against the dollar after Erdogan’s comments, down from 2.0977.

Erdogan said in televised comments, “Don’t make a mockery of this nation with a half of a percentage point cut”.

The “strong call for a considerable rate cut” would either urge the central bank governor to resign or prompt greater cuts in rates, Ozlem Derici, chief economist at Deniz Invest in Istanbul, said in an e-mailed note. The lira has weakened amid concern that a laxer monetary policy will spur inflation or the central bank will lose its credibility, she said.

More rate cuts will hurt the lira, Cristian Maggio, an emerging-markets strategist at Toronto-Dominion Bank in London, wrote in e-mailed comments.

 

Sources ‘Zaman’ and ‘Bloomberg’

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