The cost of borrowing money in Turkey is rising despite interest rate cuts in the country. Turkish President Recep Tayyip Erdogan’s unconventional economic policy to combat high inflation by lowering interest rates seems to be counterproductive.
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Since the Turkish central bank started cutting interest rates in September, 10-year government bond yields have risen by more than 7 percentage points, reaching a record high of 24.9 percent on Wednesday. The Turkish government will therefore have to pay more interest when issuing new government bonds. The interest rate on government bonds also serves as a kind of basic rate for mortgages and consumer loans.
The increase comes as investors worry that monetary policy will remain much too loose to contain high inflation. Currency depreciation will reduce the value of their property in local currency.
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The rapid rise in borrowing costs underscores the challenges Erdogan faces in putting his controversial interest rate policy into practice. He believes that higher interest rates actually lead to higher prices, which goes against current economic theories. Under pressure from Erdogan, the central bank has cut interest rates considerably in the past four months.
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The central bank has lost control of inflation.
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Due to high inflation, households are demanding higher rates on their savings accounts and investors are pricing in a higher risk premium. “Turkey has given up using its interest rate weapon and the central bank has lost control of inflation,” said Ogeday Topcular, a money manager at RAM Capital. The increase in borrowing costs on the market, he says, is a “natural result” of the policy.
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Dollars
The Turkish lira lost nearly a third in value this quarter as Turks began buying dollars en masse to protect their savings. To stop the fall of the lira, a new program was introduced earlier this month to protect the savings of Turkish citizens against the exchange rate fluctuations of their own currency.
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The lira rose in value by more than 50 percent after the intervention last week. But while the measures have provided some respite for the lira’s exchange rate, so far there is little evidence that they are reducing borrowing costs.
On Thursday, the currency again came under pressure against the euro and the dollar, amid investors’ lack of confidence in the central bank’s measures to stabilize the lira.
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