The Turkish lira cemented its status as the worst performing major of the year, plummeting to new record lows on Wednesday a day before the central bank is expected to slash rates further despite soaring inflation after Turkish President Tayyip Erdogan said he will continue his battle against interest rates "to the end."
In comments that chopped the currency's value by as much as 3%, pushing the USDTRY to a fresh record of 10.6364, Erdogan said he would lift the interest rate burden from people - i.e., he would force the "independent" central bank to keep cutting rates or else he will just fire the country's top banker again and replace him with an even more docile puppet - and urged businesses to invest, hire and raise exports.
Foreign investors, having given Turkey the benefit of the doubt for much of the past decade, are finally fleeing the country, saying that Erdogan - who has long described himself as an enemy of interest rates - has swayed monetary policy too far with his frequent calls for stimulus and his rapid overhaul of the central bank's leadership.
A day before a central bank policy meeting, at which it is expected to cut rates by another 100bps, the president repeated his unorthodox view that higher rates were the cause of inflation and questioned why some of our "friends" defended tight policy.
"We will lift this scourge of interest rates from people's backs. We certainly cannot allow our people to be crushed by interest rates," he told lawmakers from his ruling conservative AK Party in parliament.
"I cannot and will not stand on this path with those who defend interest rates," Erdogan said, in the process sending the lira crashing to a new all-time low of 10.63, adding to steep losses after what analysts have called premature and risky monetary easing. The currency later rebounded a bit but is down 30% so far this year.
The central bank has bucked expectations and cut its policy rate by 300 basis points since September, even as inflation climbed to near 20%, delivering the stimulus long sought by Erdogan.
Taking a page out of the Fed and BOE book, the Turkish central bank has stubbornly claimed that price pressures are temporary; it is expected to cut rates by another 100 basis points to 15% on Thursday, despite inflation topping 20%.
Erdogan's latest outburst is hardly new: in the past he has aggressively commented on monetary policy ahead of central bank meetings, often moving markets. The lira has lost 64% of its value since the end of 2017 in part due to tattered central bank credibility. As he left parliament in Ankara, Erdogan said the central bank would decide on rates "independently" when its monetary policy committee meets at 1100 GMT on Thursday.
In Touch Capital Markets senior FX analyst Piotr Matys said cutting rates on Thursday would be too risky with the lira under pressure, and he predicted no policy change, although he will most likely be wrong.
"In order to stabilize the lira, the bank would have to reverse those 300-basis-point cuts since September but I think that the bar for it to make a U-turn is still set fairly high," he said, operating under the assumption that Erdogan cares about lira stability when clearly that is no longer the case.
"Tomorrow's meeting could prove the most important for (Central Bank Governor Sahap) Kavcioglu. Allowing the lira to fall at such a rapid pace will cause serious damage to the Turkish economy," Matys added. Ironically, that may be just what Erdogan wants.
The lira's depreciation stokes prices via Turkey's heavy imports, and also raises default risks for companies with foreign currency debt. The depreciation combined with inflation has meanwhile eaten into Turks' earnings.
Erdogan, who appointed Kavcioglu in March, also pulled his best Federal Reserve impression and questioned why business people did not take out loans and invest in risk assets as rates were lowered in the last few months.
"Then they get together (and) talk about high interest rates," he said, referring to the main business group TUSIAD and others.
"What type of people are you? If you are a businessman you are on the side of investment, so here are you go: loans with low interest," Erdogan said, adding he expected them to raise investment, employment, exports and production.