ISTANBUL (AP) - Turkey’s currency tumbled Tuesday amid growing questions over the central bank’s ability to set policy without interference from the increasingly powerful office of President Recep Tayyip Erdogan.
The central bank decided to not raise rates, defying broad expectations in the markets for an increase of at least one percentage point to its one-week repo rate, from 17.75 percent. Analysts interpreted that as due to pressure from Erdogan’s government, which wants low rates to encourage growth.
As a result, the Turkish lira dropped as much as 4 percent, an unusually big fall for a currency. The lira has lost more than a fifth of its value against the dollar since the start of the year.
Erdogan has opposed high rates in order to boost growth and argues that cheaper loans lead to slower inflation. In fact, raising rates is the main way central banks around the world contain inflation and support their currency. A falling currency can become a problem as it makes it harder for Turkish companies to service debt held in foreign currencies and weakens the returns on foreign companies’ investments in the country.
Erdogan got sweeping new powers after a general election last month, when Turkey’s ruling system transformed into an executive presidency, and has promised that he’d have greater influence over monetary policy.
In modern market economies, the central bank is meant to be independent of government policy to avoid it being manipulated for political reasons. The idea that Erdogan is bringing Turkey’s central bank under his control is worrying investors that he could push for rates to remain lower than they should be to tame inflation, the central bank’s main goal.
Jason Tuvey, senior emerging markets economist at Capital Economics, said the central bank decision showed Erdogan is “already using his strengthened position to influence monetary policy.”
Speaking in parliament Tuesday, Erdogan said the new system would enable Turkey to reach its goals and that international investors would profit. “Big investors will directly be in contact with the Presidency,” he said.
Following his inauguration, Erdogan appointed his son-in-law Berat Albayrak as the head of treasury and finance, raising further concerns over the independence of monetary and fiscal policy.
Albayrak tweeted a statement Tuesday that said a new economic plan - yet to be announced- will curb inflation, which is at a high annual rate of 15.4 percent.
He said, without providing details, that combatting inflation will continue “in coordination with steps necessary to meet growth targets, with a holistic approach and in line with mutually complementary policies.”
To assuage investors, the minister had earlier promised the central bank would remain independent. But economist Timothy Ash of BlueBay Asset Management said the bank’s decision Tuesday undid efforts to “rebuild the confidence of the market.”
Erdogan’s 15 years in power have seen the Turkish economy grow robustly and he frequently cites economic expansion - which was 7.4 percent last year - as proof of good governance. But that growth has also led to a big current-account deficit, rising inflation, currency depreciation and high corporate debt in foreign currencies.
Please read our comment policy before commenting.