Lira slides after Turkish President Erdogan says Islam demands lower rates

The lira tumbled to another record low after Turkish President Recep Tayyip Erdogan pledged to continue cutting interest rates, referring to Islamic proscriptions on usury as a basis for his policy. 

The currency weakened more than 6% to trade as low as 17.624 per dollar in early Asian trading Monday, heading for a fifth day of declines. It’s lost almost half its value over the past three months, the biggest retreat of any currency in the world over that period. 

“What is it? We are lowering interest rates. Don’t expect anything else from me,” Erdogan said Sunday in televised comments from Istanbul. “As a Muslim, I’ll continue to do what is required by nas,” he said, using an Arabic word used in Turkish to refer to Islamic teachings. 

It’s the second time in a month Erdogan has invoked religion to justify the current monetary stance, which is in line with his demands for lower borrowing costs to boost economic growth. The lira’s collapse is the outcome of an economic siege, but Turkey won’t back down from its new economic policy, he said. 

The currency has retreated 57% this year versus the dollar, a slump that accelerated last month after Erdogan unveiled an economic model that relies on lower borrowing costs and a cheaper currency. 

“Lower real rates, weakening fundamentals and tighter global financial conditions will drive the lira further down” unless Erdogan changes course, Minna Kuusisto and Jakob Christensen, analysts at Danske Bank A/S, wrote in a report published Monday. 

In the eyes of the president, Turkey can free itself from reliance on foreign capital flows by abandoning policies that prioritized higher interest rates and strong inflows. At the heart of his ideas is a belief that lower interest rates will also curb consumer price growth -- the opposite of the consensus view among the world’s central bankers. 

He’s put that idea to the test since September when the central bank began cutting interest rates despite soaring consumer prices, culminating on Thursday in another 100 basis-point reduction that left the benchmark rate at 14%. The ensuing monetary stance eventually left the lira unanchored, with the currency sinking to fresh record lows almost every day.  

The currency’s collapse fed into consumer prices almost overnight, resulting in inflation so rampant that supermarket employees have been barely able to keep up with changing labels. Working-class Turks and pensioners began forming long lines in front of municipality stalls to get subsidized bread in recent weeks while the country’s top business associations started publicly attacking the government for destabilizing the economy.  

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“Of course, we know the impact from price increases on people’s daily lives. We are of course aware of the instability caused by the lira’s fluctuations and its impact on prices,” Erdogan said. “But we will put up resistance against these. I announce from here: there is no backing down.” 

Erdogan’s most recent policy pivot also drew the ire of Turkish industrialists, with several business associations calling for measures to stabilize the lira’s exchange rate. 

Key business group Tusiad -- once the umbrella organization for Turkey’s most powerful businesses -- called on Erdogan’s government over the weekend to abandon the current policy stance, citing recent market turmoil as proof that the experimental model is bound to fail.  

Erdogan hit back at Tusiad and others critical of him, warning them that “they won’t be able to challenge the government.” 

“You are working to put in power a government that you can exploit. This nation will not allow you to do that,” he said. 

The lira was trading at 17.411 per dollar as of 9:49 a.m. Istanbul time Monday.