If Erdogan has any hope of restoring investor confidence, he will need to backpedal quickly on his commitment to keep cutting interest rates. This would seem particularly true today for Turkey in a challenging world economic environment and at a time of economic derisking. He has done so by firing central bank governors, getting rid of public servants who had the temerity to express an economic view contrary to the party line, and by weakening Turkey’s economic institutions.Įxperience teaches that once lost, economic confidence is difficult to rebuild. At the same time, the government’s finances have been eroded by handouts and juiced-up public spending in advance of the election.ĭomestic and foreign investors have taken fright at Erdogan’s concentration of economic policy decision making in his hands. The central bank has all but depleted its international reserve holdings in defense of the currency, the banking system has large foreign-exchange liabilities, and Turkey’s external current account deficit sits at 5.9% of gross domestic product. If Erdogan could ill-afford to engage in highly unorthodox economic policy experimentation last year, he finds himself in an even worse position to do so today. Yet Erdogan persists in arguing that lower interest rates are what Turkey needs to stabilize markets and bring inflation back down to tolerable levels. He did so even though inflation accelerated to 85% in the middle of last year before being reduced by artificial measures ahead of the elections to a still-high 44%.

He did so even as the Turkish lira lost more than half of its value against the dollar.

Over the past two years, as inflation rose, he leaned heavily on the Turkish central bank to progressively cut interest rates from 19% to their present level of 8.5%. Never mind, too, that many economists think that he has left the reservation on this issue.Įrdogan has not shown much sign of learning from economic experience to date. Never mind that practically every other major central bank in the world has shifted to a hawkish monetary policy stance in their efforts to tame the inflation beast. He does so in a mistaken belief that far from being a cure for inflation, higher interest rates are inflation’s primary cause. Erdogan has insisted that as long as he is in power, he will continue to cut interest rates.

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