Turkish President Recep Tayyip Erdogan is in the midst of an ongoing economic hurricane as the local currency continues to devalue in addition to the rising yields on Turkish bonds, which have rocketed past the 20% yield level. However, unlike Turkish bond yields, Erdogan prefers interest rates to go the opposite direction with rates being as low as possible.
Despite the country facing pressure to hike interest rates, Erdogan’s words echo the Turkish central bank’s decision to remain steadfast in preserving a low-rate environment.
“Interest rates should be kept to a minimum because they are a tool of exploitation that makes the poor poorer and the rich richer,” Erdogan said in a speech.
To some market experts, it will take more than just an interest rate hike to solve Turkey’s economic woes.
“There are only three options to halt the freefall of the Turkish lira,” tweeted Dani Rodrik, an economist at Harvard University. “1. Sell dollars at the expense of using up the central bank’s reserves. 2. Announce a serious rate hike. 3. Capital controls. Choose your poison.”
Turkey Economic Issues
In addition to bonds, the economic issues in Turkey and the geopolitical tensions with the United States also gave the Turkish lira no reprieve, hitting an all-time low of 7.24 against the U.S. dollar. In an effort to prop up the currency, the Turkish central bank lowered the reserve requirement for banks by 250 basis points to improve liquidity conditions.
As benchmark Turkish bonds see record-levels in terms of yield, prices of dollar-denominated bonds issued by the Turkish government and banks fell even further on Monday. Some Turkish bank debt fell over 15 cents on the dollar.