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Turkish lira continues to slide as Erdogan vows ‘not to come back’ on rate cuts

The Turkish lira continued its free fall after President Recep Tayyip Erdogan dismissed warnings from business circles about the dangers of recent rate cuts and stated that his approach would ” not return”.

The currency, which has lost 50% of its value against the dollar since Erdogan ordered the central bank to start reducing borrowing costs in September, fell to a new record low of 17.5 vs. dollar after the market opens on Monday. The more than 6% drop in the lira was much worse than the 0.2% drop for the MSCI Emerging Markets Currency Index.

In a sign of growing concern about the impact of a falling currency on the health of the broader financial system, the cost of protecting against a default Turkish debt has risen sharply. According to IHS Markit data compiled by Refinitiv, the five-year debt swap spread has increased to 575 basis points, from around 300bp at the start of the year.

Erdogan has pushed his country of 83 million people into a currency crisis by insisting on four rate cuts in the past four months despite rising inflation, thwarting global trends at a time when Other central banks around the world are looking to combat price volatility by raising prices.

The Turkish president, who rejects the economic mainstream view that raising interest rates helps tackle inflation, dismissed warnings from business circles about the dangers of his approach.

“Do not expect anything else from me,” he said in a televised address on Sunday night. “As a Muslim, I will continue to do whatever the religious decrees require,” he added, referring to Islam’s prohibitions on usury.

Line chart of 5-year CDS spread (bps) showing Cost to hedge against a rise in Turkish debt

Earlier in the day, he also dismissed suggestions that he could be forced to impose capital controls to stem the currency’s plunge, describing the idea as “ridiculous”.

The Turkish president said the country was pursuing a “new economic model” that would take advantage of low exchange rates and a competitive currency to boost exports, investment and jobs.

Economists warn it will create dangerous inflation and financial instability in a country heavily dependent on foreign finance.

The annual inflation rate officially hit 21% in November, and economists expect it to rise further in the coming months as a weaker lira rapidly leads to higher prices, especially due to Turkey. significant use of energy and imported raw materials.

In his remarks on Sunday night, Erdogan acknowledged public concerns about soaring prices but considered the problems temporary – and saw them as part of the national struggle for independence. economy.

“Of course we know that price increases are causing many problems in our people’s daily lives. We are of course aware of exchange rate volatility, price volatility and uncertainty that this creates,” he said.

“But we will fight these things just as we stand against guardians, terrorist organizations, tyrants and global power magnates. I’m telling you, there’s no turning back. ”

He attacked Tusiad, the country’s largest business association, on Saturday urging the government to return to “established rules of economic science” to restore stability and prevent damage. further harm to businesses and the public.

“Hey Tusiad and your descendants,” he said. “I am telling you, you have a job: investment, production, employment, growth. . . You can’t interfere in what we’re doing.”

A day earlier, the head of Turkey’s Union of Exchanges and Commodities (TOBB), which represents small and medium-sized businesses and has previously supported Erdogan’s approach, warned that the Financial turmoil is “disturbing and negatively affects many of our companies”.

Rifat Hisarciklioglu, president of TOBB, has called on the government to take “urgent steps” to stabilize markets and restore a more predictable business environment.

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