Top Erdogan Aide Says Turkey May Cut Interest Rate Next Week

  • Overnight lending rate is deterring investment, Ertem says
  • Turkey needs new model to continue fast-paced economic growth

Turkey’s central bank may cut its overnight lending rate, one of three it uses to determine borrowing costs, next week because it is deterring investment and helping to keep inflation above target, President Recep Tayyip Erdogan’s chief economic adviser said.

The cost of borrowing in Turkey remains excessively high and the overnight rate is a key gauge watched by commercial lenders, Cemil Ertem said Thursday in an interview with NTV television. The lira pared gains before surging again, trading 0.4 percent higher at 2.8587 per dollar at 2:23 p.m. in Istanbul.

Erdogan has repeatedly called on the central bank to lower interest rates to tame inflation, which is running at close to 9 percent compared with the bank’s 5 percent target. His argument runs counter to the typical view that higher rates will work to slow inflation, and Erdogan has drawn criticism from investors for undermining policy makers’ credibility and independence.

Turkish central bank Governor Erdem Basci has said that liquidity should be kept tight, and that it will be impossible to lower inflation to the target level until 2018.

Turkey has room to lower borrowing costs now that the U.S. Federal Reserve has said it is likely to raise interest rates more slowly, said Piotr Matys, an emerging markets FX strategist at Rabobank in London, who includes a rate cut in his baseline scenario.

Political Interference

But doing so now may be interpreted by investors as a sign of yielding to political pressure, while delaying it will create a difficult situation for Basci’s successor given that his term expires on April 19, he said.

“Imagine if his successor cuts rates at his first meeting?” Matys said. Authorities should limit political interference so that the lira isn’t under pressure if or when the central bank does decide to lower rates, he said.

Borrowing costs in emerging markets and developed markets will converge, Ertem said.

“We think that Turkey’s existing economic model has come to a successful ending, and that there’s a need for a transition to a new model,” Ertem told NTV. “The ongoing debate about interest rates is essentially a debate about a new growth model.”

The central bank’s monetary policy committee is scheduled to meet March 24.

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