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Economy

Erdogan's call for rate cut drives Turkey's lira to fresh lows

Leader's call for lower rates by 'July or August' rattles currency markets

Turkish President Recep Tayyip Erdogan has ousted three central bank chiefs in two years.   © Reuters

ISTANBUL -- Remarks by Turkish President Recep Tayyip Erdogan urging the central bank chief to lower interest rates battered the lira down to fresh lows against the dollar early Wednesday morning here, rattling the currency market with his unconventional monetary views.

"I spoke to the central bank governor today. It is imperative that we lower interest rates," Erdogan told state-run broadcaster TRT on Tuesday night. "Interest rates should start falling around July or August."

The lira softened nearly 4% to 8.8 against the dollar in early trading as uncertainty over future monetary policy fueled selling, shattering the record of 8.61 set just last week. The currency recovered to around 8.6, but remains 26% below its most recent peak of 6.89 in February. The lira has fallen around 20% over the past year.

Erdogan ousted the previous central bank governor, Naci Agbal, in March -- the third such firing in two years -- after an unexpectedly large rate hike of 2 percentage points intended to rein in stubbornly high inflation.

The president tapped fellow rate-cut advocate Sahap Kavcioglu to replace Agbal. But the new governor has avoided cuts so far, maintaining the current policy rate of 19%, amid the lira's dramatic fall.

In the TRT interview, Erdogan reiterated his long-standing view that high interest rates cause inflation. Lower rates are needed to promote investment and stabilize the economy, he said, arguing that cuts will reduce production costs and thereby limit upward pressure on prices.

The consensus among economists is the reverse -- that rate cuts spur inflation and higher rates shore up currencies and reduce inflationary pressure.

Because Turkey relies on imports of energy and other resources, a weak lira pushes prices higher. The consumer price index surged 17% on the year in April, continuing a trend of double-digit inflation that has lasted for most of the past few years.

"Short-term selling is predominating due to the uncertainty surrounding monetary policy, and the market remains prone to large swings," said Toru Nishihama of Dai-ichi Life Research Institute in Tokyo.

Additional reporting by Takako Gakuto in Tokyo

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