Turkey Economy Chief Says Economists Wrong as Rates Too High

Turkey’s government is pushing for more interest rate cuts, saying they’ll help to slow inflation even as economists and investors warn the opposite holds true.

Economy Minister Nihat Zeybekci said in an e-mailed statement today that the central bank’s main interest rates are higher than market expectations and must be brought down quickly to stop “cost inflation.” Consumer prices rose by an annual 9.3 percent last month, more than any economist forecast and nearly twice the pace targeted by the central bank.

The remarks show how the Turkish government, led by Prime Minister Recep Tayyip Erdogan, is pressuring the central bank to put an untested theory of economics into action. While central bankers around the world, including Turkey’s, make interest rate decisions based on the textbook assumption that higher rates work to slow inflation, Erdogan and Zeybekci argue that high rates are the cause of quickening inflation.

The theory rests on the argument that producers forced to borrow at higher rates then push those costs on to consumers, driving prices higher, Zeybekci explained today.

“Turkish inflation isn’t demand-driven,” Zeybekci said in an interview with NTV television after his e-mailed statement. “It’s driven by the cost of financing.”

Disregard Economists

Zeybekci urged the central bank to disregard calls from commercial bank economists to stop the easing cycle that started in May.

“It’s the exact opposite of interpretations that say we shouldn’t have a rate cut at the next meeting of the monetary policy committee,” Zeybekci said. “We support our central bank and think that rates need to be cut until they meet expectations of markets that support production, investment and exports.”

Government pressure means the bank will probably lower its main one-week repo rate at its next meeting on Aug. 27 should the lira remain stable, Maya Senussi, an economist at Roubini Global Economics LLC, said in a note for clients yesterday.

“We expect the Turkish central bank to look past the surprise re-acceleration in July inflation, extending its unjustified and politically motivated easing cycle,” she said.

Market Expectations

The lira strengthened 0.3 percent to 2.1258 per dollar at 11:55 a.m. in Istanbul today, extending its appreciation this year to 1.1 percent. Yields on two-year bonds fell 18 basis points, paring yesterday’s 58 basis-point increase, the largest since May. At 9.14 percent, Turkey’s local-currency yields are third-highest among 21 major emerging markets tracked by Bloomberg.

Banks including Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co. raised their estimates for Turkish year-end inflation yesterday, each citing lower interest rates that are driving inflation.

Zeybekci said that the central bank should cut rates because that’s also what the market expects.

“Markets expect lower interest rates than the current levels due to the economic and political stability of our country,” he said. “We insist that high real interest rates have an absolute impact on cost inflation.”

Central bank Governor Erdem Basci said in a presentation to Erdogan’s government in June that the inflation rate would fall after a 550 basis-point emergency rate increase in January, and that interest rates could then be brought down. Basci has cut the one-week repo rate by a cumulative 175 basis points since May to 8.25 percent last month. The government wants rates to be cut back to levels in January, when the main rate was 4.5 percent.

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