The Turkish lira has stabilised recently, although it remains near historic lows against the dollar and euro, at 13.7 and 15.5 respectively.
Erdogan’s latest comments have so far been of little help to the national currency and have not allowed it to develop a rebound after the grand overselling. In particular, the Turkish president remains firmly in the position that lower interest rates will reduce inflation in the country, and the results will be visible early next year.
Mentioning that low rates will solve the inflation problem and stabilise the currency seems only to inflame the greed of currency speculators, reversing the already relatively modest achievements of the Bank of Turkey, which has intervened to stop the one-sided movement of the national currency.
From the economic side, the cumulative effect of the recent devaluation (+65% since September and 77% y/y) will be transferred to consumer prices in the coming months, which promises to be a much bigger problem for Turkey than for other EM countries.
Erdogan’s dispute with the conclusions of the conventional economic theory could be called a remarkable experiment if the welfare of millions of people in the country were not at stake. The decline in interest rates in response to rising inflation and a falling currency can be compared to the populist policies of some Latin American countries in previous years, which caused an endless devaluation of their currencies and a decline in living standards. And at the moment, it isn’t easy to find economic reasons to say that Erdogan’s stance allows for a bet on the rise of the lira.