Erdogan Unbowed by Critics, Leaving Little Stopping Lira’s Collapse

Turkish President Recep Tayyip Erdogan addresses his supporters during a ceremony in Istanbul, Turkey, November 5, 2021. (Reuters)
Turkish President Recep Tayyip Erdogan addresses his supporters during a ceremony in Istanbul, Turkey, November 5, 2021. (Reuters)
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Erdogan Unbowed by Critics, Leaving Little Stopping Lira’s Collapse

Turkish President Recep Tayyip Erdogan addresses his supporters during a ceremony in Istanbul, Turkey, November 5, 2021. (Reuters)
Turkish President Recep Tayyip Erdogan addresses his supporters during a ceremony in Istanbul, Turkey, November 5, 2021. (Reuters)

Little stands in the way of Turkey's currency collapse expanding into a deeper economic crisis after President Recep Tayyip Erdogan ignored appeals, even from within his government, to reverse policy, according to top officials and analysts.

Two people familiar with internal discussions said some government officials are uncomfortable with Erdogan's rate-cutting strategy and told him this. But they have not convinced him, and others have given up trying, they said.

This could set the stage for an intensifying showdown between rattled investors and local savers on one side and on the other, Erdogan - who has dismissed several ministers and top bureaucrats who previously were able to challenge and persuade him on some policy decisions.

"Some people who wanted to convey the opinion to the president that a different policy should be followed were not successful in this," said a senior official in the ruling AK Party, requesting anonymity.

"There is a very strict attitude from the presidency that the current practice will continue, interest rates will be kept low and inflation will decrease along with it."

The presidential office did not immediately respond to a request for comment.

Twice in the last week Erdogan has pledged publicly to see through his battle against high interest rates, dumping fuel on a fire sale of Turkish assets and sending the lira plunging as much as 23% in that period.

Though the currency recouped some losses on Wednesday, anxious Turks say the collapse has upended their family budgets and future plans.

Economists say if Erdogan doesn't reverse course and free up the central bank to hike rates, Turkey faces soaring inflation and possible corporate or bank defaults.

But unlike during 2018's currency crisis - when the central bank jacked up rates, albeit late, to stem the bleeding - there is little prospect of a quick intervention this time.

"The general view at the presidency is that if this policy continues for a few more months, the process will reverse and the exchange rate will fall ... so it appears it will remain in place," said the second source familiar with internal talks.

"The views of some officials ... who do not think these policies are right do not appear to be taken into consideration."

Goldman Sachs analyst Murat Unur said the risk of dollarization remains "very high" given the rush to purchase hard currencies, which already account for more than half of Turks' deposits.

"The current macroeconomic policy mix is not sustainable but the authorities have clearly shown that they prefer low rates and are willing to implement them even if this leads to significant pressure on the lira," he said in a note.

Erdogan unmoved

Erdogan has long espoused the unorthodox view that high interest rates cause inflation and has promised to prove the doubters wrong in what he calls an "economic war of independence" ahead of elections in 2023.

To test his theory, Erdogan has overhauled the central bank leadership and pressed it to slash the policy rate by 400 basis points since September, to 15%, despite inflation running near 20% - and much higher for basic goods like food.

Some of those who in the past advised Erdogan have recently criticized the monetary easing that the president says will stoke exports, investment and jobs.

Economists say inflation could blow through 30% unless steps are taken to reverse the currency depreciation, which raises import prices.

But there is no apparent circuit breaker, especially after Erdogan installed a like-minded governor, Sahap Kavcioglu, at the bank in March and fired the last remaining orthodox policymakers last month.

Treasury and Finance Minister Lutfi Elvan, also seen as a moderate, has kept out of the spotlight and there has been speculation he too could be ousted, though the Palace has not commented.

The central bank left the door open for another rate cut next month - a move Erdogan likely still supports.

Koc University-TUSIAD Economic Research Forum director Selva Demiralp said continued easing will only cancel out any benefits from higher demand.

"Even short term benefits from rate cuts cease to exist if the central bank insists on cutting rates and disregards inflation," said the former US Federal Reserve economist.

The central bank, already lacking credibility, said on Tuesday it would only intervene at times of "excessive volatility" - as the lira dove 15% in its second-worst day ever.

Analysts say authorities could redouble efforts to secure foreign currency swap lines from allies, which could help in any necessary interventions given official reserves remain thin.



Oil Up as Market Watches US-China Trade Talks

FILE - Pumpjacks are seen before sunrise in Hobbs, N.M., Feb. 24, 2025. (AP Photo/Julio Cortez, File)
FILE - Pumpjacks are seen before sunrise in Hobbs, N.M., Feb. 24, 2025. (AP Photo/Julio Cortez, File)
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Oil Up as Market Watches US-China Trade Talks

FILE - Pumpjacks are seen before sunrise in Hobbs, N.M., Feb. 24, 2025. (AP Photo/Julio Cortez, File)
FILE - Pumpjacks are seen before sunrise in Hobbs, N.M., Feb. 24, 2025. (AP Photo/Julio Cortez, File)

Oil prices climbed on Tuesday as investors awaited the outcome of US-China talks that could pave the way for easing trade tensions and improve fuel demand.

Brent crude futures rose 28 cents, or 0.4%, to $67.32 a barrel by 0330 GMT. US West Texas Intermediate crude was up 23 cents, or 0.4%, at $65.52.

On Monday, Brent had risen to $67.19, the highest since April 28, buoyed by the prospect of a US-China trade deal, Reuters said.

US-China trade talks were set to continue for a second day in London as top officials aimed to ease tensions that have expanded from tariffs to rare earth curbs, risking global supply chain disruptions and slower growth.

Prices have recovered as demand concerns have faded with the trade talks between Washington and Beijing and a favorable US jobs report, while there are risks to North American supply due to wildfires in Canada, Goldman Sachs analysts said.

US President Donald Trump said on Monday that the talks with China were going well and he was "only getting good reports" from his team in London.

A trade deal between the US and China could support the global economic outlook and boost demand for commodities including oil.

Elsewhere, Iran said it would soon hand a counter-proposal for a nuclear deal to the US in response to a US offer that Tehran deems "unacceptable", while Trump made clear that the two sides remained at odds over whether the country would be allowed to continue enriching uranium on Iranian soil.

Iran is the third-largest producer among members of the Organization of the Petroleum Exporting Countries and any easing of US sanctions on Iran would allow it to export more oil, weighing on global crude prices.

OPEC+, which pumps about half of the world's oil and includes OPEC members and allies such as Russia, is accelerating its plan to unwind its most recent layer of output cuts.

"The prospect of further hikes in OPEC supply continues to hang over the market," Daniel Hynes, senior commodity strategist at ANZ, said in a note.

"A permanent shift to a market driven strategy (in OPEC) would push the oil market into a sizeable surplus in H2 2025 and almost surely lead to lower oil prices."