Erdogan Revives Old Aversion to High Rates Even as Prices Soar

  • Turkish president questions link between high inflation, rates
  • Speech comes hours after data shows prices are soaring

Turkish President Recep Tayyip Erdogan renewed his long-standing battle with high interest rates -- even with the country’s core inflation running at the highest level in more than a decade.

“High interest rates will never bring down the inflation rate,” Erdogan told lawmakers in a televised speech on Tuesday, reviving an unconventional argument he has avoided for several months -- but delivered hours after the latest data showed prices are soaring. “The current view is that they are inversely proportional. No, they are not. We have seen this.”

Though Erdogan stopped short of calling for an immediate rate cut and didn’t attack the central bank directly -- something he has avoided since Governor Murat Cetinkaya took over last year -- the speech shows his discomfort with lending costs currently at the highest level in at least six years. The president may also be trying to head off a future rate increase even if price gains warranted such a move, according to Nomura Plc economist Inan Demir.

The intervention is likely to “make sure that the central bank doesn’t have the room to tighten further,” Demir said by email. “The level of core inflation and the import boom already present strong enough reasons to hike rates -- though the central bank is unlikely to do so unless pressure on the lira intensifies.”

Econ 101 Is Bunk to Erdogan in Debate on Interest Rates Role

The lira weakened 0.4 percent to 3.5814 per dollar at 2:33 p.m. in Istanbul.

The monetary policy committee led by Cetinkaya has raised the cost of lending this year to support the lira, and although the currency has stabilized, it is still about 20 percent weaker than a year ago against a currency basket of the dollar and euro. That’s pushing prices higher for both consumers and producers, and the regulator has pledged to keep the cost of lending elevated until the inflation outlook improves.

Core inflation, which excludes volatile items such as food and energy, rose an annual 11 percent through last month, the most since 2004 and outpacing all economists’ estimates in a Bloomberg survey, Turkstat said on Tuesday. The headline inflation rate also exceeded expectations, rising to 11.2 percent.

Higher Prices

Consumer prices rose 0.65 percent on the month, Turkstat said, slightly exceeding economists’ estimates. Producer prices rose an annual 16.3 percent through September, stoking fears that manufacturers and service providers will continue to pass on rising costs to consumers.

The inflation increase last month was mostly due to seasonal factors, Customs Minister Bulent Tufenkci told Bloomberg after the report, adding that he expects “some” decline in the rate this month.

The central bank had predicted that prices of food and basic goods -- driven by strong domestic demand -- would continue to push inflation higher. It is unlikely to ease in the coming months, with the government planning to raise some taxes significantly next year to accommodate higher defense spending. The official inflation target is 5 percent.

“Such a high level of core inflation will make it harder for the headline rate to slow rapidly, and with such high rates, it’s unlikely that the central bank will take action the rest of the year” to lower lending costs, said Inanc Sozer, a managing director of Istanbul-based Turkey Macro View Consulting. Sozer said a methodology change is adding to apparel price gains, which he expects to peak this month and help keep core inflation just under 13 percent.

— With assistance by Selcan Hacaoglu, and Firat Kozok

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