Turkish Rate Cuts Offer Panacea for Zeybekci as CPI Rises

Inflation that’s almost double the target shouldn’t stop Turkey’s central bank from cutting interest rates to spur economic growth, Economy Minister Nihat Zeybekci said.

Tightening access to credit by keeping borrowing costs high will only curb inflation temporarily while hurting investment in manufacturing, Zeybekci said in an interview yesterday. He spoke after August inflation was announced at 9.54 percent, exceeding economists’ estimates.

Turkish officials, led by President Recep Tayyip Erdogan, have repeatedly urged central bank Governor Erdem Basci to lower borrowing costs to spur the economy, which is set to miss the government’s 4 percent growth target this year, according to a Bloomberg survey. The inflation goal is 5 percent.

Zeybekci, speaking at his office in Ankara, said that authorities are debating whether to broaden the central bank’s mandate to include job creation in addition to price stability.

“If the central bank can’t see increasing output and employment as well as expanding the economy among its policies, along with curbing inflation, and if there is a need for a legal change for the bank to do that, then Turkey should be able to do it,” Zeybekci said. “This should not be a moment of crisis.”

‘Loan-Shark Rate’

Basci, who left the bank’s benchmark rate unchanged last month after three consecutive cuts, vowed earlier this week to keep policy tight until inflation slows.

The bank should base its decisions on expected inflation in 12 months’ time, which stood at 7.35 percent in a central bank survey last month, instead of the current inflation rate, Zeybekci said.

He said Turkish businesses and consumers are paying “a loan-shark rate” to borrow. The average interest rate for lira-denominated commercial bank loans was 12.7 percent on Aug. 22, down from 15.8 percent in March. Bank fees push the cost for industrialists as high as 14 percent, Zeybekci said.

The minister is part of a group of Turkish policy makers and politicians including Erdogan who argue that lower interest rates will help bring inflation down, the opposite of the orthodox economic view.

‘Certain Fallacy’

A study by the economy ministry found that high financing costs force producers to keep output at lower levels than in the past, Zeybekci said. They then have to increase production rapidly at times of rising demand, pushing consumer-price inflation higher, he said.

“Inflation targeting may lead to a certain fallacy,” the minister said. “The first instrument that comes to mind when trying to curb inflation is interest rates, which are raised to cool down demand. Why don’t we think of using the same instruments to increase output and create jobs, for a more definitive fight with price jumps?”

Turkey’s two-year government notes had the best rally among major emerging market bonds after Basci’s emergency rate hike in January, which convinced investors that the bank would eventually rein in inflation.

The yield on two-year lira notes has fallen 202 basis points since then, to 9.04 percent at 4:30 p.m. in Istanbul today. The lira strengthened 6 percent in the same period, the most among emerging-market currencies in Europe, the Middle East and Africa. It traded at 2.1527 per dollar today.

Turkish industrialists will remain competitive with the lira in a range of 2.15 to 2.25 per dollar while excessive imports are discouraged, Zeybekci said. Creating the necessary interest-rate environment for manufacturers to increase output is the most sustainable way to rein in consumer inflation while keeping the economy growing, he said.

“Inflation targeting and price stability should not be the only task of the central bank,” Zeybekci said. “Nothing that’s against the interests of the Turkish economy can be sustainable. And right now, that means the high level of interest rates.”

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