Erdogan Says Interest Rates Will Fall After Inflation Slows

Andrew Cummings
November 21, 2020

Turkey's central bank raised its benchmark interest rate on Thursday, when it held its first meeting under its new chief, in a bid to tame inflation and to prop up the struggling currency.

The nation's bank ramped up the rate by a massive 475 basis points, the steepest increase in over two years.

German Institute for global and Security Affairs (SWP) analyst Sinem Adar said Thursday's rate decision showed that Erdogan's warning appears to have been made for domestic consumption.

The Turkish lira, which rallied about 10 percent last week following Erdogan's pledges, gained some new ground against the greenback (+1.6 percent).

'What high interest rates cause is obvious.

Mr. Erdogan's about-face and the ensuing rate increase has pushed the lira sharply higher.

However, these were not enough to contain the inflation rate, which at an annual rate of 11.89 percent in October is well above the actual target of five percent, or to reassure global investors. Turkey's currency is still down 22 per cent since the end of a year ago.

Erdogan, known as a staunch opponent of raising interest rates, said Wednesday that Turkey should attach much greater importance and focus on employment, production, investment, and exports in the coming period. Under the new Joe Biden administration in the United States, the Turkish government may face possible USA sanctions over its previous purchase of a Russian missile system.

"Turkey's growth process will be planned and controlled in a way that doesn't contradict our fight for macroeconomic stability and against inflation", he said, promising that the country would experience a sustainable growth path in two years' time.

"Now we are at a time when even stepping up a gear is not enough, a time that requires a change of tool".

Albayrak, who took the finance reins in mid-2018, has been blamed for defending the currency with foreign exchange interventions and depleting foreign reserves of the central bank with costly policy interference in the currency markets.

The Turkish leader insisted that Ankara will continue to provide all of the suitable conditions needed for both domestic and worldwide investors. Can we create employment?

At the core of the lira's losses has been concerns about the fallout of the COVID-19 pandemic on the already vulnerable national economy and its widening current account deficit and foreign-denominated debt coupled with high inflation and unemployment. It had grown by 4.5 percent in the previous three months.

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