Analysis: Erdogan undefeated by critics, leaving little room for pound collapse

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Turkish President Tayyip Erdogan addresses his supporters at a ceremony in Istanbul, Turkey, November 5, 2021. REUTERS / Umit Bektas

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Some officials disagree with the policy of lowering rates – sources But Erdogan has held firm internally – sources Inflation is expected to soar unless the policy is reversed.

ANKARA, Nov. 24 (Reuters) – Turkey’s currency collapse turned into a deeper economic crisis after President Tayyip Erdogan ignored calls, even from his government, to reverse the policy, senior officials say and analysts.

Two people familiar with the internal talks said some government officials were uncomfortable with Erdogan’s rate-cutting strategy and told him so. But they didn’t convince him, and others gave up trying, they said.

This could pave the way for an increasingly intense confrontation between shaken investors and local savers on one side and Erdogan on the other – who sacked several ministers and senior officials who previously were able to challenge him and to persuade him about certain political decisions.

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“Some people who wanted to convey the opinion to the president that a different policy should be followed failed to do so,” a senior official in the ruling AK party said on condition of anonymity.

“There is a very strict attitude from the Presidency that the current practice will continue, interest rates will be kept low and inflation will fall with it.”

The presidential office did not immediately respond to a request for comment.

On two occasions in the past week, Erdogan has publicly pledged to carry out his battle against high interest rates, throwing fuel on a discount sale of Turkish assets and dropping the lira from 23% during this period. Read more

Although the currency recovered some losses on Wednesday, worried Turks say the collapse has wreaked havoc on their family budgets and future plans. Read more

Economists say that if Erdogan doesn’t change course and free the central bank to raise rates, Turkey will face soaring inflation and possible corporate or bank failures. Read more

But unlike the 2018 currency crisis – when the central bank raised rates, albeit belatedly, to stem the bleeding – there’s little chance of a quick intervention this time around.

“The general opinion in the Presidency is that if this policy continues for a few more months, the process will reverse and the exchange rate will drop (…) so it looks like it will stay in place,” said the second. source close to internal talks. .

“The views of some officials (…) who do not think these policies are fair do not seem to be taken into account.”

Goldman Sachs analyst Murat Unur said the risk of dollarization remains “very high” given the rush to buy hard currencies, which already account for more than half of Turks’ deposits.

“The current mix of macroeconomic policies is not sustainable but the authorities have clearly shown that they prefer low rates and are willing to implement them even if this puts significant pressure on the pound,” he said. stated in a note.

ERDOGAN IMPOSSIBLE

Erdogan has long espoused the unorthodox view that high interest rates cause inflation and has vowed to prove skeptics wrong in what he calls a “war of economic independence” ahead of the 2023 election. Read more the following

To test his theory, Erdogan revised the management of the central bank and urged it to cut the key rate by 400 basis points since September, to 15%, despite inflation close to 20% – and much higher for commodities like food.

Some of those who have advised Erdogan in the past have recently criticized monetary easing which the president says will boost exports, investment and jobs.

Economists say inflation could exceed 30% unless action is taken to reverse the currency depreciation, which increases import prices.

But there’s no apparent breaker, especially after Erdogan installed like-minded governor Sahap Kavcioglu at the bank in March and fired the remaining Orthodox policymakers last month. Read more

Treasury and Finance Minister Lutfi Elvan, also considered a moderate, has stayed out of the spotlight and there has been speculation that he too could be ousted, although the palace has not commented .

The central bank has left the door open for another rate cut next month – a move Erdogan likely still supports.

Koc-TUSIAD University Economic Research Forum director Selva Demiralp said further easing would only nullify the benefits of higher demand.

“Even the short-term benefits of rate cuts cease to exist if the central bank insists on cutting rates and ignores inflation,” said the former US Federal Reserve economist.

The central bank, which already lacks credibility, said on Tuesday it would only intervene in the event of “excessive volatility” – the pound having plunged 15% on its second worst day in history.

Analysts say authorities could redouble their efforts to secure currency swap lines from allies, which could help with any intervention needed as official reserves remain limited.

Kavcioglu met with UAE officials in Ankara on Wednesday for preliminary discussions on a possible swap line, two sources told Reuters. Read more

Regulators could also impose some restrictions on local businesses and individuals who buy dollars, euros and gold to slow the depreciation of the pound, analysts said.

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Written by Jonathan Spicer; Editing by Hugh Lawson

Our Standards: The Thomson Reuters Trust Principles.

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