Erdogan's Dangerous Obsession With Low Rates

Erdogan's Dangerous Obsession With Low Rates

The collapse of the Turkish lira this year has been a chronicle of a disaster foretold. Once a star performer among emerging-market currencies, the currency has plunged, thanks mainly to President Recep Tayyip Erdogan’s fixation on slashing interest rates. 

His bizarre adherence to a low rate policy, even as accelerating inflation would typically call for the opposite course, has dragged the lira to a 20-year low and wreaked havoc on the country’s import-dependent economy. With prices surging, many Turks are now struggling to pay for food and other necessities. 

The currency crisis also has shattered the confidence of foreign investors. Analysts are warning of more economic shocks to come, and rating agencies S&P and Fitch have lowered Turkey’s sovereign credit rating to negative.

But neither Turks nor foreign investors should hold out for any change of heart from Erdogan. If anything, the central bank's decision today to cut rates even further suggests the president is doubling down. He has long clung to the notion that high rates fuel inflation, rather than curbing it, as conventional economic principles suggest. Indeed, the Turkish president has described interest rates as “the mother and father of all evil.” Meanwhile, his policies have pushed inflation above 20%.

With his ruling AK Party slipping in the polls and opposition forces coalescing against him, the president’s prospects of holding on to power probably rest on an economic recovery before a general election in 2023. He firmly believes low rates are a precondition for such a recovery. To underscore his conviction, Erdogan has in the past nine months replaced both the finance minister and central banker who dared disagree with him. 

Meanwhile, the price shocks have shrunk the value of incomes and savings, sparking protests in Ankara and Istanbul. Turks facing the burden of soaring food prices aren’t amused by suggestions from AK Party leaders that they simply eat less. Nor are they reassured by the party’s promise that Turkey will be among the world’s top 10 economies by 2023. (It is currently ranked 20th.)

For their part, foreign investors can at least draw some reassurance from the fact that there is remarkably little fear of a spillover of Turkey’s travailsOther emerging-markets currencies are under strain, but mostly for reasons of slower economic growth, a more robust dollar and fears about the Covid omicron variant — not because of unconventional monetary policies.

But if Turkey’s economic woes are contained for now, the geopolitical fallout is much harder to predict. Like populists everywhere, Erdogan has tended to use foreign-policy adventurism to distract Turks from domestic distress.

It isn’t too late to arrest the lira free fall. To do so, Erdogan will first need to accept that his policies are causing more harm than good, and the central bank will need to raise rates. Bloomberg Economics estimates that rate increases of 550-800 basis points will help stabilize the currency; even stronger medicine may be required if inflation continues to surge.

But after 18 years at the helm, Erdogan is showing no sign of letting up on his quixotic tilt against economic convention. The Turkish economy roared back from the pandemic with a 21.7% spurt in GDP in the second quarter, before slowing to a still-impressive 7.4% in the third. But untamed prices, leading to lower consumption, will curb growth. Many analysts are warning of a 2018-style recession next year, especially if the central bank continues to cut rates under pressure from the president.

Could a prolonged economic crisis bring the Erdogan era to a close? He was re-elected in the teeth of the 2018 recession, even though his party suffered a significant loss of the vote share. But the president did allow the central bank to raise rates in order to halt the lira’s decline the month before the vote. 

That would be a difficult trick to pull off twice, however. For one thing, the current crisis is deeper than the one in 2018, not least because it comes on the heels of the economic impact of the Covid pandemic. 

Meanwhile, Turkish opposition parties, sensing political weakness in a president who has until now seemed invulnerable, are calling for elections to be moved up. “The latest turmoil will push undecided voters upset by the economic outlook into opposition ranks,” Can Selcuki, head of Istanbul-based pollster Turkiye Raporu told Bloomberg News. “The odds of the ruling party falling short of 30% support rate permanently have increased.”

This in turn reduces the odds of Erdogan calling an early election. More likely, he will hold out in the expectation that his eccentric economic theories yield the recovery he needs. But while the president waits for hope to triumph over experience, Turks and foreign investors should not hold their breath.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Bobby Ghosh is a Bloomberg Opinion columnist. He writes on foreign affairs, with a special focus on the Middle East and Africa.

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