The Turkish central bank’s resistance to the deep interest-rate cuts demanded by Prime Minister Recep Tayyip Erdogan is shoring up its independence as policy makers keep the taming of inflation their top priority.
Central bank Governor Erdem Basci pared the biggest increase in emerging-market bond yields yesterday after saying consumer-price growth at twice his 5 percent target left room for only “measured” rate reductions of 25-to-75 basis points. Two-year yields climbed as much as 24 basis points and ended the day 14 basis points higher as sectarian fighting in neighboring Iraq showed no sign of abating.
Erdogan said last month the half-percentage point cut the central bank announced May 22 was “a joke” given it more than doubled the benchmark rate to 10 percent in January, saying that excessively tight monetary policy exacerbates price jumps. Basci said yesterday he won’t find peace until inflation slows.
“Mr. Basci is doing what most central bank chiefs’ mandate is -- to secure independence in the decision-making process,” Simon Quijano-Evans, head of emerging-market research at Commerzbank AG in London, said by e-mail yesterday. “He is telling us that rates will be cut in line with the drop in inflation, which makes sense.”
A spokesman in the Prime minister’s office declined to comment.
The jump in yields trimmed a decline of 224 basis points since March, more than any quarter since 2009, data compiled by Bloomberg show. The lira sank 1.1 percent, the most among 24 developing-nation currencies monitored by Bloomberg, yesterday and climbed 0.3 percent to 2.1373 at 10:03 today. Yesterday’s level was the weakest against the dollar in more than seven weeks.
The lira has underperformed every emerging-market currency with a slide of nearly 3 percent against the dollar since June 10, when Islamist militants seized 49 people including the Turkish consul general in Mosul, Iraq’s second-largest city. The Iraqi military pummeled the positions of Sunni Muslim insurgents who have captured territory north of Baghdad.
The depreciation has added to the inflationary pressures that Basci must take into account, Henrik Gullberg, a currency strategist at Deutsche Bank AG in London, wrote in e-mailed comments yesterday. It isn’t “just the fact that inflation is still running high, but also obviously the regional uncertainties” that are important, said Gullberg.
Basci said yesterday the central bank was a technical institution that shuns politics. It unexpectedly cut interest rates on May 22, two weeks after European Central Bank President Mario Draghi said policy makers are “comfortable” taking further stimulus measures at their next meeting to counter the threat of deflation.
Domestic politics may also have played a role, according to Peter Skoettegaard Oeemig, an economist at Jyske Bank A/S in Silkeborg, Denmark. “My impression is that the lowering of the interest rate at the last meeting already was a consequence of political pressure -- or to avoid it -- so I don’t think he can resist the political pressure for lowering the interest rate further, probably with 50 basis points at the coming meetings.”
Among the signs of higher interest rates damping economic growth, consumer loans for cars fell for a fifth week, dropping 0.6 percent, according to data from the central bank published June 12. Growth in total consumer loans slowed to 0.3 percent in the week ended June 6 from 0.5 percent the previous week. Imports dropped 9.5 percent to $20.7 billion in April, the fourth consecutive monthly decline, data from the Statistics Office show.
“Ahead of a rate decision, we would never expect a central bank governor to tell us what the cut will be,” Charles Robertson, the London-based global chief economist at Renaissance Capital, said by e-mail yesterday. “But he is giving forward guidance that Turkey can afford to cut rates -- justified by evidence of domestic weakness in car sales or import data.”
To contact the reporter on this story: Selcuk Gokoluk in Istanbul at email@example.com