The Turkish lira hit a record low on Tuesday after Recep Tayyip Erdogan vowed to take greater control of monetary policy if he wins elections next month.
Speaking on a visit to London, the Turkish president restated his commitment to lower interest rates and said that, after the country’s transformation from a parliamentary to a presidential system comes into force following snap polls on June 24, he would have greater control over the economy.
“When the people fall into difficulties because of monetary policies, who are they going to hold accountable?” Mr Erdogan said in an interview with Bloomberg Television. “They’ll hold the president accountable. Since they’ll ask the president about it, we have to give off the image of a president who’s influential on monetary policies.”
He admitted that his greater role “may make some uncomfortable”, adding, “but we have to do it. Because it’s those who rule the state who are accountable to the citizens”.
The lira, which has lost more than 17 per cent of its value since the start of the year, plunged to its lowest ever point against the dollar following the publication of Mr Erdogan’s remarks. It was 1.5 per cent weaker against the US currency at 4.4310 per dollar by midday in London.
The lira’s sell-off has come as part of a broader turning of sentiment against emerging markets, which have seen investors selling off amid mounting concerns about weakening economic growth and growing debt levels.
Last week, Mauricio Macri, Argentina’s reform-minded president, was forced to request aid from the IMF after a series of central bank interest rake hikes failed to stem a sell-off in the Argentine peso. Despite interest rates being jacked to 40 per cent and Mr Macri’s IMF request, the peso resumed its slide on Monday, falling more than 7 per cent.
After a turbulent few weeks for the Turkish lira, foreign investors hoped that the Turkish leader would use his three-day visit to London to reassure the City that he would allow the central bank to step in to support the currency, curb double-digit inflation and tame GDP growth amid increasing concerns that the Turkish economy is overheating. Instead, he doubled down.
Mr Erdogan has for years harboured a deep antagonism towards high interest rates, taking the unconventional view that they cause rather than curb inflation. Last week, he warned that they were “the mother and father of all evil”, fuelling concern that he would not allow the central bank the freedom to raise rates.
The Turkish president told Bloomberg that cutting interest rates would lower inflation. “The lower the interest rate is, the lower inflation will be,” he said. “The moment we take it down to a low level, what will happen to the cost inputs? That too will go down . . . you will be able to get the opportunity to sell your products at much lower prices . . . The matter is as simple as this.”
According to attendees, Mr Erdogan made similar “astonishing” comments about interest rates at a private event in London on Monday. Several people present told the Financial Times that Mr Erdogan outlined his thinking about interest rates and inflation at Chatham House, the international affairs think-tank.
Asked if the Turkish president’s remarks on Monday had reassured him, one representative of an international fund management company said “not at all”. He added: “When you hear things like that, you really start to wonder.”
Mr Erdogan also told Bloomberg that his frequent interventions on interest rates influenced the central bank, and stated his intention to continue. “Of course our central bank is independent,” he said. “But the central bank can’t take this independence and set aside the signals given by the president, who’s the head of the executive. It will make its evaluations according to this, take its steps according to this. And I believe this will result in very beneficial steps in the future.”
Asked about reports in the Turkish press that the deputy prime minister Mehmet Simsek, who has a close relationship with foreign investors, may leave government after the elections, Mr Erdogan sidestepped the question.