According to senior officials and analysts, after President Recep Tayyip Erdoğan ignored even calls from within the government to reverse policy, Turkey’s currency collapse expanded into a more serious economic crisis. There is almost no hindrance.
Two people familiar with internal discussions said that some government officials were uncomfortable with Erdogan’s interest rate cut strategy and told him this. But they didn’t convince him, and others gave up trying, they said.
This may lay the foundation for a fierce showdown between nervous investors and local depositors on the one hand. On the other hand, Erdogan has fired several ministers and senior bureaucrats who were previously able to challenge and challenge some policy decisions. Convince him.
A senior official of the ruling AKP, who asked not to be named, said: “Some people want to convey to the president their opinions that different policies should be adopted, but they have not succeeded in this regard.”
“The President’s attitude is very strict. The current practice will continue, interest rates will remain low, and inflation will fall.”
The president’s office did not immediately respond to a request for comment.
Last week, Erdogan twice publicly promised that he would fight high interest rates, dump fuel in the sell-off of Turkish assets, and caused the lira to plummet by as much as 23% during this period.
Although the currency made up for some losses on Wednesday (November 24), anxious Turks said that the currency collapse has upended their family budgets and future plans.
Economists said that if Erdogan does not change direction and allows the central bank to make time to raise interest rates, Turkey will face soaring inflation and possible corporate or bank defaults.
But unlike during the currency crisis in 2018, when the central bank raised interest rates to stop the bloodshed, although it was too late, the possibility of this rapid intervention is very small.
“The general view of the president is that if this policy continues for a few more months, the process will be reversed and the exchange rate will fall… so it seems to remain the same,” said a second source familiar with internal negotiations.
“The views of some officials…they think these policies are incorrect and seem to have not been taken into account.”
Goldman Sachs analyst Murat Unur said the risk of dollarization is still “very high” given the boom in buying hard currency, which already accounts for more than half of Turks’ deposits.
“The current combination of macroeconomic policies is unsustainable, but the authorities have made it clear that they prefer low interest rates and are willing to implement low interest rates, even if it will put a significant pressure on the lira,” he said in a report.
Erdogan Unmoved
Erdogan has long supported the unorthodox view that high interest rates will lead to inflation, and promised to prove skeptics wrong in what he called the “war of economic independence” before the 2023 election.
To test his theory, Erdogan has overhauled the leadership of the central bank and pressured it to lower the policy rate by 400 basis points since September to 15%, despite the fact that the inflation rate is close to 20%-and food etc. The inflation rate of basic commodities is much higher.
Some people who have advised Erdogan in the past have recently criticized the president’s monetary easing policy that will stimulate exports, investment and employment.
Economists say that unless measures are taken to reverse currency depreciation, the inflation rate may exceed 30%, which will increase import prices.
But there is no obvious circuit breaker, especially when Erdogan appointed a like-minded president Sahap Kavcioglu at the bank in March and fired the last month. After the remaining orthodox decision makers.
Finance Minister Lutfi Elvan is also regarded as a moderate and has been far from the spotlight. There is speculation that he may also be deposed, although the palace did not comment.
The central bank opened the door for another rate cut next month-Erdogan may still support this move.
Selva Demiralp, director of the Koc University-TUSIAD Economic Research Forum, said that continued easing will only offset any benefits from higher demand.
The former Federal Reserve economist said: “If the central bank insists on cutting interest rates and ignores inflation, even the short-term benefits of cutting interest rates will no longer exist.”
The central bank, which already lacks credibility, said on Tuesday that it will only intervene when there is “excessive volatility”-because the lira fell 15% on the second worst day in history.
Analysts said that the authorities may redouble their efforts to obtain foreign exchange swap lines from allies, and given that official reserves are still small, this may help any necessary intervention.
Two sources told Reuters that Kavcioglu met with officials from the United Arab Emirates in Ankara on Wednesday to conduct preliminary negotiations on potential swaps.
Analysts said that regulators may also impose some restrictions on local companies and individuals buying U.S. dollars, euros and gold to slow the further depreciation of the lira.
