President Recep Tayyip Erdogan’s assertions that interest rates would be decreased and stop Turkey’s nearly 19% inflation from rising further have sparked fresh jitters in financial markets as the Turkish leader appears bent on spurring economic growth at the expense of costly side effects.

Erdogan’s remarks last week came as a signal that he intends to pressure the central bank to lower rates, sticking to his unconventional view that high interest rates cause high inflation. Following his remarks, the Turkish lira, which was already under pressure from global trends, weakened as low as 8.64 to the dollar Aug. 6 — it had been 8.56 — and has stayed in that region since (it was around 8.65 to the dollar Aug. 11). The downtick is expected to continue in the coming days, raising the specter of a fresh dollarization wave.

According to the international credit rating agency Fitch, the already high dollarization rate in Turkey, driven by the lira’s dramatic depreciation since 2018, is likely to increase further as real yields are turning negative after annual consumer inflation hit 18.95% in July and almost caught up with the central bank’s 19% policy rate. Analysts at investment bank Morgan Stanley, meanwhile, expect rate cuts this year, but not an immediate one at the central bank’s Aug. 12 meeting.

Contrary to Erdogan’s assertions, the rise in consumer prices is expected to continue in August under the impact of shortfalls in food supply amid drought and wildfires plaguing the agricultural sector and a huge gap with producer inflation, which stands at 45% year-on-year. Erdogan’s comments about an upcoming rate cut despite the gloomy inflation trend has fueled concern that he is playing down inflation and would force the central bank to lower rates.



Written by Mustafa Sönmez