The Turkish lira continued its free fall after President Recep Tayyip Erdogan dismissed corporate warnings about the dangers of recent interest rate cuts and vowed there would be “no turning back” on its approach.
The currency, which has lost 50% of its value against the dollar since Erdogan ordered the central bank to start cutting borrowing costs in September, fell to a new record low of 17.5 from the dollar after the markets opened on Monday. The more than 6% drop in the pound was much worse than the 0.2% drop in the MSCI Emerging Market Currency Index.
As a sign of growing concern about the fallout from the fall in the currency on the health of the financial system as a whole, the cost of protecting against default on Turkish debt has risen sharply. According to IHS Markit data collected by Refinitiv, the spread on the five-year credit default swap increased to 575 basis points, from around 300 bps at the start of the year.
Erdogan plunged his country of 83 million people into a currency crisis by insisting on four interest rate cuts in the past four months despite rising inflation, bucking the global trend at one point where other central banks around the world seek to combat price instability by raising rates.
The Turkish president, who rejects the economic orthodoxy that rising interest rates help fight inflation, has dismissed business warnings about the dangers of his approach.
“Don’t expect anything else from me,” he said in a televised speech on Sunday night. “As a Muslim, I will continue to do whatever the religious decrees require,” he added, referring to Islam’s prohibitions on usury.
Earlier today, he also rebuffed suggestions that he could be forced to impose capital controls in a bid to stop the currency’s fall, calling the idea “ridiculous.”
The Turkish president said the country was pursuing a “new economic model” that would capitalize on low rates and a competitive currency to boost exports, investment and jobs.
Economists warn that this will create rampant inflation and dangerous financial instability in a country heavily dependent on foreign funding.
The official annual inflation rate hit 21% in November and economists expect it to rise further in the coming months as the weaker pound is quickly passed on to high prices, especially given the Turkey’s significant use of imported energy and raw materials.
In his remarks on Sunday night, Erdogan acknowledged public concerns about soaring prices, but described the problems as temporary – and presented them as part of a national struggle for economic independence.
âOf course, we know that price increases cause problems in the daily lives of our people. Of course, we are aware of the volatility of the exchange rate, the volatility of prices and the uncertainty that this creates, âhe said.
âBut we will resist it as we have resisted the tutelage, the terrorist organizations, the putschists and the barons of world power. I’m telling you, there is no going back.
He attacked Tusiad, the country’s largest trade association, which on Saturday urged the government to revert to “established rules of economics” to restore stability and prevent further damage to businesses and the public.
âHi Tusiad and your offspring,â he said. âI’m telling you, you have a job: investment, production, jobs, growth. . . You cannot interfere with what we are doing.
The day before, the president of the Turkish Union of Chambers and Commodity Exchanges (TOBB), which represents small and medium-sized enterprises and has in the past supported Erdogan’s approach, warned that the financial turmoil was “concerning and negatively affected many of our businesses â.
Rifat Hisarciklioglu, president of TOBB, called on the government to take “urgent measures” to stabilize markets and restore a more predictable environment for business.