President Recep Tayyip Erdoğan on Monday reiterated his opposition to high borrowing costs, as he ruled out any interest rate increases, stressing that Türkiye would follow its own economic policy.
Erdoğan’s remarks come days after the country’s central bank delivered a surprise rate cut, against the backdrop of soaring inflation running at a 24-year high.
“What Türkiye needs is not a rate hike but an increase in investment, employment, production, exports and current account surplus,” Erdoğan told a televised address after chairing a Cabinet meeting in the capital Ankara.
The government has stuck to its plan which it expects will eventually help flip the country’s chronic current account deficits to surpluses.
Erdoğan said Türkiye would set its economic policy based on its own interests and needs.
The Central Bank of the Republic of Türkiye (CBRT) last week slashed its benchmark policy rate by 100 basis points.
It spelled out its sharp focus on economic growth as it unexpectedly lowered the one-week repo rate to 13% from 14%, the level it was kept at for the last seven months.
The bank said the cut was aimed at driving economic growth and sustaining employment amid growing geopolitical risk. It added that rising loan rates have diminished the effectiveness of the monetary policy.
“Economics theories aren’t valid everywhere, unlike physics or mathematics,” Erdoğan said. “These theories vary according to the conditions and strength of a country.”
The Turkish leader is known for his opposition to higher borrowing costs, which he says only makes “the rich richer and the poor poorer.”
In June, he vowed that his government would continue lowering interest rates rather than increasing them.
Erdoğan recently defended the policy of lower borrowing costs, insisting that it had helped save 10 million jobs. He has promised to lower inflation, asking for the public to show patience.
The central bank’s policy-setting committee (MPC) said it needed to act because leading indicators pointed to a loss of economic momentum in the third quarter.
Türkiye’s annual inflation rose at a slower-than-expected pace in July but still reached a fresh 24-year high of nearly 80%, stoked in part by surging energy prices due to Russia’s invasion of Ukraine.
The bank said inflation was driven by the lagged effects of rising energy prices, pricing formations that are not supported by economic fundamentals, and negative supply shocks.
It repeated that disinflation should begin thanks to steps the bank and other authorities have taken to cool some forms of credit, along with an eventual end to the war. The CBRT last month raised its year-end inflation forecast to 60.4% and saw it peaking near 90% in the autumn.
Separately, Treasury and Finance Minister Nureddin Nebati on Tuesday said Türkiye’s inflation would enter a sharp downward trend as of December due to favorable so-called base effects and the fall will continue throughout 2023.
The government has been affirming its commitment to boosting production, exports and employment with a low-rates policy, and has promised a current account surplus that is said to eventually steady the Turkish lira and cool inflation.
A windfall of foreign funds arriving in Türkiye and sustained interest in a state-backed deposit scheme have brought relief for the government’s economic plan.
Strong exports and tourism have helped to finance a current account deficit which narrowed in June, despite heavy energy costs, according to the latest data.
Relief began in July when foreign visitors jumped by more than 50%, exceeding pre-pandemic levels thanks partly to a leap in arrivals from Russia.
The central bank’s foreign reserves have nearly tripled since early July to $15.7 billion on a net basis.
Adding to relief, a lira-protection scheme unveiled in December cleared a big hurdle in July and August when $30 billion in deposits were rolled over without issue, according to data calculated by bankers.
Only a further $3 billion in deposits need to be rolled over next month, and little more until next year, locking many companies in for another six months to the deposit protection scheme, known as KKM.
The scheme seeks to curb demand for foreign currency by compensating depositors for lira losses against foreign currencies.
Depositors are lured to KKM by cheaper credit and tax incentives, bankers, companies and officials told Reuters. In total, protected deposits are worth TL 1.2 trillion ($66.23 billion), data shows.
