Jul 24, 2018

Any illusions that Turkey’s new economy minister, Berat Albayrak, might inject reason into policy were shattered on July 24 when the country’s Central Bank decided to keep interest rates steady, plunging the country’s currency to further lows.

“The president has sacrificed Albayrak. No one will trust Turkey from here on,” tweeted veteran financial analyst Atilla Yesilada. The Turkish lira lost 3% against the dollar following the announcement. “It is clear that the [Central Bank] was instructed by Erdogan and his shadowy team of advisers not to touch the rates,” Yesilada’s PA Intelligence consultancy observed in a research note.

With growing worry about rising inflation and a ballooning current account deficit, the move took investors by surprise. Markets had been expecting a rate increase of about 100-125 basis points, according to a Reuters poll. Albayrak, who is Turkish President Recep Tayyip Erdogan’s son-in-law, had raised hopes of a hike when he told reporters en route to the G-20 summit in Argentina that Turkey “would not fight the markets” and “would be more attractive to foreign investors than ever.”

The Central Bank’s decision is more likely to send them into flight, as it signals that Erdogan, who was re-elected with vastly expanded powers on June 24, will keep a tight grip on the economy along with every other aspect of policymaking. It means that Erdogan will continue to implement his own strategy, which is pinned on the unconventional view that lower interest rates allow for lower inflation and higher growth.

Nora Neuteboom, one of the rare economists who correctly predicted that the Central Bank would not hike rates, explained Erdogan’s thinking. His goal is “to improve the economic position of households,” which she noted can be achieved either by stimulating high growth or lowering inflation, and Erdogan has picked the former.