Recep Tayyip Erdogan has climbed back on his favorite economic hobby horse, resuming his quixotic charge against high interest rates. This augurs ill for Turkey’s economy, which has historically paid a large price for the president’s phobia.
Speaking to a group of business leaders on Friday, Erdogan issued a thinly veiled criticism of his new central bank governor for raising borrowing costs late last year: “Whether they listen or not, I’ll continue my struggle,” he said. “There is one thing I believe in, we can’t achieve anything with high interest rates.”
The president has clung to this line throughout his political career. Erdogan maintains that high rates fuel inflation, even though conventional economic theory says the opposite is true. A succession of central bankers has had to bend monetary policy to his will, with predictable consequences: surging prices, a plunging lira and investor flight.
There was a moment last fall when it seemed that the new central-bank governor, Naci Agbal, might be able to return to monetary orthodoxy: He raised interest rates by the largest margin in over two years. In December, he announced another hike. (Cumulatively, he has raised the benchmark interest rate by 675 basis points to 17%.) The lira strengthened on both occasions, rallying 14% in the last two months of the year. Buoyed, investors returned to Turkish stocks and bonds.
With inflation remaining stubbornly high — climbing to 14.6% in December from 14% in November — Agbal was expected to maintain tight credit in the new year. Erdogan’s uncharacteristic silence on the topic allowed for some optimism that the governor would have a free hand.
But the president’s return to his ideé fixe puts Agbal in a position all too familiar to his predecessors. Investors are betting that, like them, he will do his master’s bidding: The lira rally has faltered, and the bloom is off Turkish stocks.
The negative reaction was entirely predictable, so you have to wonder what compelled Erdogan to untie his tongue. After all, if the goal was simply to pressure Agbal, the president could have called the governor. By stating his druthers in public, Erdogan was plainly sending a political message.
