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December 21, 2021

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Lira plunges after Erdogan cites religion against increasing rates

Turkey’s troubled lira nosedived yesterday after President Recep Tayyip Erdogan cited Muslim teachings to justify not raising interest rates to stabilize the currency.

Erdogan has pushed the central bank to sharply lower borrowing costs despite the annual rate of inflation soaring to more than 20 percent.

Economists believe the policy could see consumer price increases reach 30 percent or higher in the coming months.

But Erdogan said in remarks aired by state television late on Sunday that his Muslim faith prevented him from supporting rate hikes.

“They complain we keep decreasing the interest rate. Don’t expect anything else from me,” he said. “As a Muslim, I will continue doing what our religion tells us. This is the command.”

Islamic teachings forbid Muslims from receiving or charging interest on loaned or borrowed money. Erdogan has previously cited his religion in explaining why he believes interest rates cause inflation instead of reining it in.

High interest rates are a drag on activity and slow economic growth. But central banks raise rates out of necessity when inflation gets out of hand.

The lira has lost nearly half its value in the past three months alone. It was trading down more than 6 percent against the dollar yesterday afternoon. A dollar could buy 7.4 lira on January 1. It was worth 17.5 yesterday.

“You cannot run a modern economy integrated into the global economy on this basis,” economist Timothy Ash of BlueBay Asset Management said in a note to clients. “Even Saudi Arabia really does not attempt full shariah compliant macro (economic) management.”

The nominally independent central bank — stacked in the past year with Erdogan’s supporters — has cut its rate to 14 percent from 19 percent in four successive moves.


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