Lira slumps after Turkey’s Erdogan says interest rates ‘evil’

Ankara (AFP) – President Recep Tayyip Erdogan on Friday declared that interest rates were the “mother and father of all evil”, a controversial comment that prompted a sharp loss in value of the Turkish lira.

Erdogan, who is campaigning for snap parliamentary and presidential elections on June 24, has repeatedly urged the central bank to cut interest rates to stimulate economic growth.

But economists have cautioned that a tighter monetary policy is needed for an economy whose currency has lost over 12 percent in value in the last three months and where inflation is running at 10.85 percent.

“Interest rates are the mother and father of all evil,” Erdogan said in a televised speech in Ankara. “Interest rates are the cause of inflation.”

Turkey’s late liquidity window (LLW) interest rate stands at 13.5 percent after a 75 basis points hike in April.

Noting the extremely low rates in the US, euro zone and Japan, Erdogan added: “We must bring down interest rates.”

Erdogan’s statements fly in the face of economic orthodoxy where interest rates are used by central banks around the world as a tool to keep down inflation.

He vowed that in the June 24 elections “I will emerge victorious in the battle with the scourge of interest rates”.

The loss in value of the lira prompted Erdogan to hold an unscheduled meeting of top economic policymakers on Wednesday which promised to take the appropriate measures to ensure the health of the economy.

The holding of the meeting prompted a rally in the value of the lira but these gains were largely wiped out after Erdogan’s comments Friday.

The lira was trading at 4.3 to the dollar, a loss of 1.8 percent in value on the day.

Erdogan acknowledged that there was an “uneasiness” in the markets but said it was the responsibility of the authorities to take measures.

He added that “we will dispell the pessimistic air that has been deliberately pumped into the markets… and God willing continue on our path with determination.”

The economy has generally been a trump card for Erdogan in his 15 years in power, with the Turkish strongman crediting himself with ending chaos that brought it to near financial meltdown in the 2000-2001 crisis.

But the elections coincide with growing concerns over Turkey’s economic health, notably due to a wide current account deficit and fears the economy is overheating.