Why Turkey’s Central Bank Might Vex Erdogan Again: QuickTake Q&A


With inflation in Turkey at 13 percent, the highest level since 2003, economists expect the central bank to boost interest rates when it meets on Thursday. That, after all, is the conventional remedy when prices are rising too quickly. But doing so risks drawing the ire of President Recep Tayyip Erdogan, who has long opposed high borrowing costs and has his own views on what causes inflation. His recent warnings have put the issue of central bank independence in the spotlight, and not for the first time.

1. What will the central bank be looking at?

Soaring inflation and the role played by a weakening Turkish lira. The currency has dropped to its lowest level in at least 14 years on an inflation-adjusted, trade-weighted basis against the currencies of Turkey’s major trading partners. Reasons for the decline include political uncertainties since a failed coup attempt against Erdogan and tensions with Europe and the U.S. Its fall is especially painful to an economy heavily dependent on imports, including energy, and a corporate sector sitting on a net foreign-currency shortfall of more than $210 billion.

2. Why does Erdogan oppose a rate hike?

The president takes the unorthodox view that inflation is fueled rather than dampened by higher borrowing costs, and he’s repeatedly called for lower interest rates to spur growth. He’s equated higher financing costs with treason and railed against what he’s called an “interest rate lobby” of speculators seeking higher returns. It’s not only an economic argument for Erdogan -- it’s also about winning loyalty at the ballot box.

3. What are the political considerations for Erdogan?

His political success was built largely on promising -- and delivering -- economic benefits to a growing middle class, using major real estate and infrastructure projects to create jobs and showcase Turkey’s rising prosperity. Inexpensive credit was key. His government returned to that recipe after a coup attempt in July 2016 triggered an economic contraction. Stimulus measures, including backing loans through a credit guarantee fund, drove an 11.1 percent expansion in the third quarter.

4. What is the central bank likely to do?

It’s pledged to keep monetary policy tight until the inflation outlook improves significantly, and it’s already raised borrowing costs by around 400 basis points this year. Economists in a Bloomberg survey predict a 100-basis point increase to the late liquidity window to 13.25 percent on Thursday.

TURKEY PREVIEW: A Hawkish Central Bank to Meet Expectations

5. What’s the case for higher interest rates?

Credit-fueled growth and lower interest rates only exacerbate the fundamental challenges facing Turkey’s economy. With a current-account deficit of around 5 percent of gross domestic product, Turkey relies heavily on foreign borrowing to finance growth. Turkey needs to keep a lid on inflation to avoid scaring this class of investor away, especially with GDP expansion set to slow next year as the impact of the government stimulus fades.

6. Is a showdown likely?

The political pressure on the bank is mounting. “Money should be cheap, plentiful and easily accessible,” Economy Minister Nihat Zeybekci said on Monday. Ahead of general and presidential elections in 2019, there’s a chance that Erdogan will ramp up his criticism of bank policy. Last month, he broke the uneasy truce with the Governor Murat Cetinkaya, saying the central bank was on the “wrong path” to tackle soaring inflation.

The Reference Shelf

  • A QuickTake explainer on central bank independence around the globe
  • A Federal Reserve Bank of St. Louis research paper on Neo-Fisherism, or the idea that raising interest rates might boost consumption and lead to faster inflation
  • A Bloomberg report on Erdogan’s economic policies
  • A QuickTake on Turkey’s recent political dramas, including Erdogan’s accumulation of sweeping new powers and his efforts to stifled debate after last year’s failed coup
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