Turkish lira gyrates as Erdogan vows ‘no going back’ on rate cuts

The Turkish lira whipsawed on Monday after President Recep Tayyip Erdogan rejected warnings from business on the dangers of recent interest rate cuts and vowed that there was “no going back” from his approach.

The currency, which has lost about 40 per cent of its value against the dollar since Erdogan ordered the central bank to start lowering borrowing costs in September, fell to a new record low of TL18.36 against the dollar on Monday. It later rallied to TL14.8 in chaotic trading late in the Turkish day after the president announced a scheme aimed at encouraging the country’s savers, who have increasingly kept their savings in dollars and gold, to hold their money in lira.

However, in a sign of growing concern over the fallout from the volatile currency on the health of the broader financial system, the cost of protecting against a default on Turkish debt has climbed sharply. The spread on the five-year credit default swap has risen to 612 basis points, from about 300bp at the start of the year, according to IHS Markit data collated by Refinitiv.

Trading on Turkey’s main stock exchange was halted on Monday for the second consecutive session following a 5 per cent decline for the flagship index. The Bist 100 trimmed its fall to 1.4 per cent after trading resumed.

Erdogan has plunged his country of 83m people into a currency crisis by insisting on four interest rate cuts in the past four months despite rising inflation, bucking the global trend at a time when other central banks across the world are seeking to combat price instability by raising rates.

The Turkish president, who rejects the economic orthodoxy that lifting interest rates helps to tackle inflation, dismissed warnings from the business world of the dangers of his approach.

“Don’t expect anything else from me,” he said in a televised speech on Sunday night. “As a Muslim, I will continue to do whatever the religious decrees require,” he added, in a reference to prohibitions in Islam on usury.