Jonathan Spicer, Orhan Koskun

ANKARA, Reuters – Turkey’s currency crisis is only a matter of time after President Tayyip Erdoan ignored all calls from his government to change policy.

Two sources familiar with internal discussions claimed that Erdogan’s rate cutting strategy was not popular with some government officials. However, they were unable to convince Erdogan and said others gave up.

This could create the conditions for a heated battle between investors who are rattled and savers in the local area. Erdogan, who dismissed many ministers as well as top bureaucrats previously capable of challenging and convincing him about some policy decisions, may also be on the horizon.

A senior member of the ruling AK Party said, “Some people wanted to communicate the opinion to President were not successful in this,” a request for anonymity was made by a top official.

The presidency has a strict policy that will not allow the practice to continue. Interest rates will remain low, and inflation will decline.

A request to comment was not answered by the presidential office immediately.

Erdogan made public promises to end his fight against high interest rates twice in the past week. He also poured fuel on an open sale of Turkish assets, sending the lira plummeting by as high as 23% during that time.

Although the currency recovered some of its losses Wednesday, Turks are still worried about the impact on their families and future plans.

Economists believe that Turkey could face high inflation and bank failures if Erdogan doesn’t change his mind and give the central bank more freedom to raise rates.

However, unlike the 2018 currency crisis, when central banks inflated rates to stop the bleeding, this time there’s little chance of an immediate intervention.

According to a second source, “If this policy is continued for several months, it will reverse” and the exchange rate would fall.

“The views and opinions of certain officials… who don’t think that these policies are correct do not seem to be considered.”

Murat Unur, an analyst at Goldman Sachs (NYSE) said that the threat of dollarization remains high due to the rush for hard currency purchases. These currencies already make up more than half the Turks’ deposit.

He stated in a note that “the current macroeconomic policy mix cannot be sustained, but authorities have clearly demonstrated they prefer low rates to implement them even though this puts significant pressure on the lire.”

ERDOGAN UNMOVED

Erdogan believes that inflation is caused by high interest rates. He has long advocated this view and promised to disprove those who doubt it in an “economic war for independence” before the 2023 elections.

Erdogan has reorganized the leadership of the central bank and asked it to reduce the policy rate to 15% from September. This despite the fact that inflation is near 20%. Basic goods such as food are much more expensive.

Erdogan was once advised by many people. However, some of them have criticised Erdogan’s monetary easing which he claims will increase investment, exports and job creation.

Economists warn that inflation can reach 30% without steps being taken to reverse currency depreciation which increases import prices.

However, there’s no obvious break in the circuit, particularly after Erdogan installed a similarly-minded bank governor, Sahap Kavioglu, last March, and fired the last remaining traditional policymakers last Month.

LutfiElvan, the Treasury and Finance Minister, is also considered moderate. There has been speculation that he might be fired, but the Palace hasn’t commented.

The central bank opened the doors to another rate cut in January – something Erdogan most likely supports.

Director of the Koc University-TUSIAD Economic Research Forum Selva Demiralp stated that continued easing would only negate any gains from increased demand.

According to the ex-economist at U.S. Federal Reserve, “Even short-term benefit from rate cuts ceases to exist if central bank insists upon cutting rates but disregards inflation.”

Already lacking credibility, the central banking said that on Tuesday it would only intervene in times of excessive volatility – with the lira dropping 15% to its second worst day.

Analysts suggest that the authorities should redouble effort to get foreign currency swaplines from allies. These could be a help for any intervention needed, given that official reserves are still very low.

According to two sources, Kavcioglu met representatives from United Arab Emirates Wednesday in Ankara. They discussed a possible swap-line and began preliminary discussions.

Analysts said that regulators could also place restrictions on individuals and local businesses buying euros, dollars and gold in order to reduce further depreciation of the lira.