Erdogan Torments on Rates as CPI Vindicates Basci: Turkey Credit

Inflation is not making life any easier for Turkish central bank Governor Erdem Basci as Prime Minister Recep Tayyip Erdogan pressures him to cut interest rates.

Consumer prices rose an annual 9.66 percent through May, the most in more than two years, according to data released by the statistics office in Ankara today. That compares with the central bank’s year-end target of 5 percent. Two-year break-even rates, a measure of investor inflation expectations, dropped 56 basis points to 6.75 percentage points today, compared with 6.19 percentage points for Brazil.

Erdogan urged the bank last week to cut rates fast, saying excessively tight policy inflames price jumps. The central bank said a combination of depreciation in the currency and food prices is driving inflation. Basci, who cut the benchmark repurchase rate by 50 basis points last month after more than doubling it to 10 percent in January, said April 30 that an improvement in current inflation and in price expectations is a prerequisite for meaningful rate cuts.

“Inflation is going to be stubbornly high during the rest of this year,” William Jackson, an emerging-market economist at Capital Economics Ltd. in London, said May 30 by phone. “There are a lot of reasons to keep the monetary policy tight. Whether the central bank is going to do that is another matter.”

Emergency Hike

The bank increased its one-week repurchase rate by 5.5 percentage points to 10 percent following an emergency rate meeting Jan. 28, a day after the currency weakened to its lowest level against the dollar. The lira gained more than 14 percent since touching a record low 2.39 per dollar on Jan. 27, the most among 24 emerging market currencies tracked by Bloomberg.

Basci’s decision to cut the rate last month failed to win support from Erdogan, who said lower borrowing costs are necessary to spur faster economic growth and reduce unemployment. Basci told the government yesterday that lowering the cost of lending too early and too fast could stoke inflationary pressures.

The yield on two-year lira notes has dropped 11 basis points since May 26, the day before Erdogan made a speech stepping up pressure on the central bank, the second most among 20 emerging markets tracked by Bloomberg. The yield increased 12 basis points to 8.57 percent 2:46 p.m. in Istanbul today.

‘Measured Cuts’

The rally is supported by investor expectations that Basci will meet those calls with “measured cuts,” Turk Ekonomi Bankasi AS fixed-income strategist Erkin Isik in Istanbul, said by e-mail yesterday. Yields would have fallen even in the absence of the government demands because investor sentiment is improving, fueled by declining U.S. yields and speculation that European Central Bank will announce further stimulus, he said.

“Recent rhetoric by the central bank shows their cautious stance has not changed,” Isik said.

Inflation has accelerated for the past five months, from 7.32 percent in November, and was last below 7 percent in May.

A premature cut risks undoing the bank’s gains from the January rates decision, Arjen van Dijkhuizen, a senior economist at ABN AMRO Bank NV in Amsterdam, said by phone May 30. “I would wait for the inflation rate to fall or at least stabilize. I wouldn’t play with fire.”

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