Turkey’s stated aim of zero real interest rates is an “ideal” scenario and the central bank proved last month that it’s ready to raise borrowing costs when needed, Deputy Prime Minister Ali Babacan said.
While the government has a “keen intention” of reducing historically high rates to more “reasonable” levels, it won’t sacrifice inflation or financial stability, Babacan said in London today. Prime Minister Recep Tayyip Erdogan’s goal of zero real rates is a long-term target, he said.
“We don’t want high interest rates and we don’t want high inflation either,” Babacan said. The central bank has a “long- term approach and will take short-term clever steps to achieve its goals” of price and financial stability in a volatile global environment.
Central Bank Governor Erdem Basci on Oct. 26 announced new policies that enable him to vary bank borrowing costs on a daily basis between 5.75 percent and 12.5 percent. The bank says that is the right mix to manage volatile capital flows, and that it will provide funds at the lower end of the range on days when the lira isn’t falling.
Turkish economic authorities are battling to reduce a current-account deficit of about 10 percent of gross domestic product by boosting exports and curbing domestic demand for imported goods. The adjustment will be helped by a weaker lira after the currency fell about 17 percent against the dollar this year, according to central bank forecasts.
‘Started to Hurt’
The lira extended losses today, dropping 0.7 percent to 1.8635 per dollar at 1 p.m. local time, close to a one-month low. Yields on two-year domestic debt rose three basis points to 10.54 percent.
The decline in the lira was intentional on the part of the central bank “until it started to hurt inflation,” Babacan said. Then the bank became more active in supporting the currency, he said.
Additional liquidity provided by authorities in the U.S. and Europe may give Turkey two or three years of breathing room to reduce its current-account deficit, Babacan said.
The deficit is the main source of worry for an economy that has strong banks and a sound fiscal position, he said. It will narrow only “gradually” in the months ahead because of Turkey’s dependence on imported goods, including oil and gas, he said. Turkey is also vulnerable to problems in Europe, which takes almost half of its exports, he said.
“When the excess liquidity is pulled back, maybe in two or three years, we need to be ready,” he said. The government has plans to support local production in selected industries and is spending more on education and encouraging research and development, he said.
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