Lira plunges again after Erdogan cities Islam to defend rate cuts

ISTANBUL: Turkey’s troubled lira shed a further five percent against the dollar on Monday President Recep Tayyip Erdogan cited Islam to justify not raising interest rates to stabilise the currency.

The lira tumbled to an all-time low of 17.70 against the dollar — more than 7% weaker from Friday’s close. The Turkish currency has depreciated by more than 55% against the dollar since the start of the year.

Even though official figures show that annual inflation has accelerated to 21%, the Central Bank has cut a key interest rate by 5 percentage points — to 14 percent — since September.

Erdogan has pushed the central bank to sharply lower borrowing costs despite the annual rate of inflation soaring to more than 20pc. Economists believe the policy could see consumer price increases reach 30pc or higher in the coming months.

However, the Turkey’s president said 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 in the televised comments.

“As a Muslim, I will continue doing what our religion tells us. This is the command,” he added.  Islamic teaching forbids Muslims from receiving or charging interest on loaned or borrowed money.

Erdogan has previously cited his Muslim faith in explaining why he believes interest rates cause inflation instead of tamping it down. High interest rates are a drag on activity and slow down economic growth.

However, central banks raise their policy rates out of necessity when inflation gets out of hand. “You cannot run a modern economy integrated into the global economy on this basis,” economist Timothy Ash of BlueBay Asset Management said, adding, “Even Saudi Arabia really does not attempt full shariah compliant macro [economic] management.”

The weakened lira is driving prices higher, making imports, fuel and everyday goods more expensive. Many people in the country of more than 83 million are struggling to buy food and other basic needs.