Econostrum | Economic News in the Mediterranean

Recep Tayyip Erdogan resigns to an indirect increase in interest rates

Written by Gérard Tur on Tuesday, December 21st 2021 à 15:46 | Read 235 times

Turkish President backs down and halts the collapse of the Turkish lira.

Recep Tayyip Erdogan resigns to an indirect increase in interest rates
TURKEY. Turkish President Recep Tayyip Erdogan said on Monday (20 December 2021) that he "would not allow any move that will stop investments and hinder exports." But in fact, on the same day, he gave in to the demands of the economic and financial circles, by creating a new tool intended to raise interest rates. The markets were not mistaken: the Turkish lira climbed by 10% on the evening of his announcement, recovering what it had lost during the day.
The low interest rate policy imposed by Recep Tayyip Erdogan against all odds has resulted in a collapse of the national currency in 2021 (-45% between 1 November and 20 December) and inflation of over 20%. It also cost the jobs of three directors of the Turkish Central Bank who were unwilling to lower the interest rate of the lira from 19% to 14% in the middle of an inflationary period.
Faced with the failure of his economic strategy, the Turkish President had brandished the Muslim religion, which prohibits usury, as a last line of defence against the severe admonition of the employers' union Tüsiad. The latter groups three quarters of the country's exporting companies. In a statement, Tüsiad called for an "assessment of the damage caused to the economy" and a "rapid return to the implementation of established economic principles within the framework of a free market economy".
Recep Tayyip Erdogan finally gave in. Without ordering a rise in interest rates, but by implementing complex indirect measures leading to the same result. In concrete terms, the state will issue new debt securities that will include a guarantee cancelling the differential between the exchange rate and the interest rate. In fact, the rent of the lira will increase, which should stabilize the Turkish currency and curb inflation.

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