Turkey’s central bank is resisting pressure from Prime Minister Recep Tayyip Erdogan to quickly reverse January’s interest-rate increases, signaling any cuts will come in gradual and measured steps.
Governor Erdem Basci said yesterday there was no need to hold an extraordinary meeting to lower rates, rejecting an April 4 call from Erdogan after his party won municipal elections the weekend before. Turkish two-year note yields declined 19 basis points to 10.41 percent yesterday, 65 basis points below the level that preceded the central bank’s Jan. 29 emergency move. Even with the drop, yields remain the highest among major emerging markets after Brazil.
Erdogan said the win for his ruling Justice and Development Party removes concern that the country faces political instability, which he blames for this year’s drop in asset prices. The central bank makes its decisions based on fundamentals, and while it will weigh a “measured step” at its scheduled meeting on April 24, comments by politicians are hurting the perception of the nation abroad, Basci said at a press conference yesterday in Kayseri, central Turkey.
“Emergency rate cuts would be a disaster,” Erkin Isik, a strategist at Turk Ekonomi Bankasi AS in Istanbul, said by e-mail yesterday. “The central bank has ample room to ease through liquidity policy first before resorting to rate cuts,” he said, referring to Basci’s ability to offer more funding to banks from the lower end of its selection of rates.
Basci raised the benchmark one-week repurchase rate to 10 percent from 4.5 percent following the January policy meeting after direct interventions in the currency market and increases in the average cost of funds for lenders failed to stem the lira’s slide to a record 2.39 per dollar. The central bank had kept the repo rate unchanged at a record-low since May.
The lira strengthened 0.4 percent to 2.1010 per dollar at 10:45 a.m. in Istanbul today, taking its gain since the meeting to 8.7 percent.
While Erdogan said another emergency session was needed to undo the increase, Basci said his preferred course was to monitor inflation and gradually decrease rates. Inflation will probably accelerate into June, he said.
Consumer prices rose 8.39 percent in March, the fastest pace since July. The annual rate will probably rise to 7.85 percent this year, from 7.49 percent in 2013, before slowing to 6.8 percent next year, according to Bloomberg surveys of economists.
The central bank should do as the prime minister requested for the benefit of the nation, Yigit Bulut, Erdogan’s adviser on economic policy, said in a column published in the Star newspaper yesterday.
“Politeness and waiting can only go up to a certain point,” Bulut wrote. “These steps will definitely be taken.”
Economy Minister Nihat Zeybekci joined Erdogan in calling for the bank to “immediately” cut rates, according to remarks quoted by state-run TRT yesterday.
“High interest rates mean unhappiness, no investments, no production,” Zeybekci said. “Our current interest rates are not rates that support Turkey’s production, employment and growth.”
Bulut couldn’t be reached for comment in calls to his office and to two mobile phone numbers yesterday. Ibrahim Ceyhan, an adviser to Zeybekci, said the minister was in meetings of the economic coordination committee and couldn’t immediately respond to queries.
Turkey’s economy will probably expand 2.3 percent this year, from 3.9 percent in 2013, according to estimates in a Bloomberg survey. Industrial production rose 4.6 percent in February, another survey showed before a report from the statistic institute today. Output climbed 7.25 percent the previous month, the most since October 2011, data showed.
Erdogan’s son-in-law, Berat Albayrak, said that while he had to respect the central bank’s decision to raise rates in January, the time has come to reverse that stance, according to a letter to the central bank, published in Sabah newspaper yesterday.
“This institution needs to rapidly lower market rates to be in harmony with the existing economic strategy,” Albayrak wrote.
Basci said yesterday that he’s seeking to put the brakes on consumer lending, while allowing commercial credit to expand at a pace that helps boost growth.
The central bank will probably give its credit policies time to work, according to Bora Tamer Yilmaz, an economist at Ziraat Investment in Istanbul.
“He is quite confident that inflation will start falling sharply in the second half of the year,” he said. “That can pave the way for possible measured cuts in September or October.”