Turkey’s central bank on Thursday held its interest rate at 19 per cent for the third month, balancing President Recep Tayyip Erdogan’s call for lower borrowing costs with the need to support the depreciating currency.

“Taking into account the high levels of inflation, and inflation expectations, the current tight monetary policy stance will be maintained decisively until the significant fall in the... forecast path is achieved,” the bank said.

Erdogan created a new wave of market jitters by repeating on June 1 that he was “determined” to see rates come down in the coming months.

He fired a central bank governor in March who won market plaudits by hiking the benchmark borrowing cost from 10.25 per cent to 19 per cent over his four-month term to fight inflation and support the lira.

Trying to calm the market, new central bank governor Sahap Kavcioglu said on June 2 that expectations of an imminent rate cut “need to disappear”.

The lira’s depreciation from around three to the dollar in 2016 to roughly 8.6 this week has been one of the factors behind a steady decline in Erdogan’s approval numbers.

An annual inflation rate of 16.6 per cent has contributed to a sharp drop in Turks’ purchasing power and price rises for basic goods.

An annual inflation rate of 16.6% has contributed to a sharp drop in Turks’ purchasing power and price rises for basic goods

Erdogan subscribes to the unconventional belief that higher interest rates cause inflation by forcing businesses to raise their prices to compensate for higher borrowing costs. Most central banks around the world believe that higher rates temper spending and this helps bring prices down.

But Erdogan’s push for cheap money has helped Turkey’s economy grow by 1.8 per cent in 2020, a year when production was crimped by coronavirus lockdowns.

The International Monetary Fund expects Turkey’s economy to expand by 5.8 per cent this year. “Although policy uncertainty and vulnerabilities have increased, Turkey’s challenges are not insurmountable,” the IMF said this month.
This required “strongly committing to, and delivering, a firm monetary stance – with no premature easing and with further timely and well-calibrated tightening if inflation expectations rise further,” it said.