Turkey’s currency plummeted after Erdogan defied critics and doubled down on his mania for low interest rates

Erdogan has a longstanding mania for low interest rates, and has replaced three central bank governors in the last two years to get his way. Inflation is running at around 20%, but Turkey’s central bank just cut rates three times in as many months—a fact the president praised in a Monday speech.

On Tuesday, the wheels fell off. The lira fell as much as 15% against the U.S. dollar, before recovering somewhat to—at the time of publication—a mere 8.3% drop in late afternoon trading. The currency has lost around a quarter of its value since the start of last week.

When the Turkish central bank cut the one-week repo rate by 100 basis points last week, analysts suggested its reference to the possibility of no cuts in December had staved off a full-blown currency crisis.

In his Monday speech, Erdogan insisted that staying the course was necessary to achieve growth and also to cut inflation. “That’s why we pay no attention to the clamor of the doomsayers,” he said, deriding critical economists as “global financial acrobats.”

On Tuesday, as the lira plummeted, economist Mohamed El-Erian warned on Twitter that there was a risk of “deepening vicious cycle of dollarization/currency mis-matches/inflation.” Meanwhile, Legal & General Investment Management’s emerging market debt chief, Uday Patnaik, told the Financial Times the fall was “the inevitable consequence of Erdogan’s war on rates.”

“We are seeing a perverse economic experiment of what happens when a central bank has effectively no monetary policy,” Bluebay Asset Management strategist Tim Ash said in a note reported by CNBC.

A weak currency isn’t always bad news for an economy. Countries often welcome a weaker currency as an engine to stimulate exports and boost competitivity. But should rates fall too far, it could scare off foreign investors. Such an occurrence could depress growth in the long run, effectively dashing any short-term benefit from cheaper local currency.

Robin Brooks, the Institute of International Finance’s chief economist, tweeted that what happened Tuesday was comparable to the lira’s August 2018 crash—an episode that was also fundamentally down to Erdogan’s low-rate fetish, although then-U.S. President Donald Trump’s doubling of metals tariffs on Turkey also played a major role.

“The lira recovered substantially after 2018 and that template holds now as well,” Brooks wrote. “In the end, Turkey is a current account deficit country and has to capitulate to markets.”

The question now is whether the lira’s mega-stumble proves contagious across emerging markets, as happened in 2018. At the time of publication, the Brazilian real was down 1% against the dollar but there was no major change in the South African rand, the Russian ruble or the Indian rupee.