Turkish President Tayyip Erdogan addresses his supporters at a ceremony in Istanbul, Turkey, November 5, 2021. REUTERS / Umit Bektas

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ISTANBUL, Nov. 23 (Reuters) – President Tayyip Erdogan has set Turkey’s $ 720 billion economy on a risky new path of aggressive interest rate cuts which he says will boost jobs, exports and growth and, paradoxically, will stem the spike in inflation and the collapse of the currency.

Erdogan has orchestrated the policy change as his opinion polls slide ahead of elections slated for mid-2023. Economists ridiculed the “experiment” as reckless and a recipe for eroding Turkish incomes and savings, given the resulting stock market crash.

Here are the main elements of the strategy that has taken shape in speeches and political decisions since September:

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The central bank, under pressure from Erdogan, has cut its key rate by 400 basis points to 15% since September. The easing caused the pound to fall 33% against the dollar, boosted inflation through imports and set Turkey apart in a world where other central banks are tightening to stem price increases.

On October 28, Central Bank Governor Sahap Kavcioglu offered an unexpected explanation: One of the best ways to bring Turkey’s 20% inflation down to a 5% target is to transform the current account deficit ” unsustainable ”in surplus. “When we get (…) a surplus, we will achieve financial and price stability,” Kavcioglu, whom Erdogan installed in March, said in a quarterly inflation update. Read more

Exports jumped 20% to $ 21 billion last month, outpacing imports and helping to generate recent trade surpluses, even though the 12-month current account remains in the red. Benefiting from the weakness of the pound, exports of machinery, cars and textiles have put the economy on track for overall growth of nearly 10% this year.

Yet this sector is only a slice of the economy and is dependent on global demand, tempering any wider immediate benefits to households. Economists also say competitive multi-year structural reforms are needed to rebalance an economy heavily dependent on imports and foreign finance, including $ 167 billion in short-term external debt.


The currency has plunged 20% since the start of last week alone. It’s the kind of dislocation that could generally prompt emergency measures to stem the bleeding, but there has been no tangible intervention from the government, regulators or the central bank.

Erdogan addressed the currency crisis in two speeches, most notably on Monday when he vowed to continue his battle against interest rates and urged Turks to see devaluation in a different and more positive light.

“The competitive strength of the exchange rate leads to an increase in investment, production and employment,” he said, adding that the country’s enemies had “played games” to read it in the past to fail. “Just as we have pulled our country out of these many traps and misfortunes, with the help of Allah and the support of our people, we will emerge victorious from this economic war of independence,” Erdogan said.


Erdogan has long espoused the unorthodox view that high interest rates cause inflation. He forced that view on the central bank, sacking three central bank governors over the past two and a half years, leaving his credibility in tatters. The recent rate cuts are the most important test of his theory.

“We have seen that the theory that inflation can only be reduced with monetary tightening has no other basis than in closed economies,” he said on Monday. “I reject policies that will contract our country as economists wish, weaken it, condemn our people to unemployment, hunger and poverty.”

Devlet Bahceli, leader of the MHP nationalist party allied with Erdogan’s conservative AK party, said on Tuesday that there was “no alternative” to lowering rates. “Turkey needs to get rid of the interest rate hunchback,” he said. “We are aware of the problems our people are facing, we see the complaints about the exchange rate, but the policies implemented are correct. Soon everything will be fine.”


Turkish private lenders are reluctant to increase credit given the risks of fueling a booming economy and possible business failures. But the big three state banks followed the lead of the central bank and cut borrowing costs in line with the easing.

“As they have done so far, our banks will continue to stand alongside our customers and businesses, helping to strengthen our country’s economy and jobs,” the banks said in a statement. spouse last month after cutting loan rates up to 200. basis points. Read more

State-owned banks also nearly doubled credit growth last year to mitigate the fallout from the COVID-19 pandemic – a move that began to push prices up and forced the central bank into a cycle of tightening which brought the key rate to 19% in March.

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Reporting by Jonathan Spicer, editing by William Maclean

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