Erdogan wants to cut the key rate in half

The Turkish head of state wants to loosen interest rates despite high inflation. This is badly received in the markets. The lira is losing significantly.

Erdogan's interest rate policy is met with rejection from investors.

Dhe Turkish President Tayyip Recep Erdogan has demanded interest rate cuts from the nominally independent central bank with unprecedented clarity. “God willing, we’re going to lower the interest rate to single digits and then further reduce that number. We are determined, ”said Erdogan in a speech to members of his ruling AK party in the parliament of Ankara. This also reduces the burden on the household. So far he had only asked for unspecific rate cuts.

At the same time, he announced that he would also want to reduce inflation to single-digit values. The rate of inflation had risen steadily over the past six months, and is currently 16.2 percent. In order to combat them, the head of the central bank, who was replaced in March, raised the key interest rate in quick succession from 10.25 to 19 percent, thereby gaining confidence in the international markets. Foreign exchange flowed into the country and the lira was able to reduce its considerable losses from the previous year.

Lira continues to lose ground

The new central bank governor appointed by Erdogan, Sahap Kavcioglu, the third central bank governor in two years, recently said it was not clear whether the central bank would cut the key rate at the next meeting next week. The prognosis is likely to be invalid after Erdogan’s intervention. The lira lost further ground against the dollar and the euro during the course of the day, trading 0.7 percent weaker at 8.19 lira per dollar. At the current inflation rate of 16.2 percent, halving the key interest rate would result in a significantly negative interest rate. Investors are unlikely to accept that.