Erdogan praises big Turkish interest rate cut and calls for more

Turkey’s president says the central bank needs to continue loosening monetary policy, gradually, as lira currency firms.

AK Party''s Extended Meeting of Provincial Heads
Turkish President Recep Tayyip Erdogan greets the crowd after delivering a speech at his party's extended meeting of provincial heads in Ankara [Anadolu]

Turkish President Recep Tayyip Erdogan has said that Turkey’s central bank’s decision a day earlier to cut interest rates sharply was “vital”, adding that the policy easing should continue at a gradual pace.

On Thursday the central bank cut its benchmark rate to 19.75 percent from 24 percent, more than expected. The decision came less than three weeks after Erdogan abruptly sacked the bank’s chief and replaced him with a deputy in a move that alarmed investors who are concerned about Turkey.

The lira, which grew stronger on Thursday following the rate cut, resumed its rally after Erdogan’s comments. It stood at 5.65 against the dollar, up from Thursday’s close of 5.70. Earlier, it rose as high as 5.62.

Speaking to provincial heads of his AK Party on Friday, Erdogan said high interest rates are the biggest obstacle to the Turkish economy, which tipped into recession after last year’s currency crisis.

“I’ve always expressed my discomfort over [high interest rates] for years. Unfortunately, we could not convey this to central bank governors of those times,” he said, adding that the governors had used “stalling tactics”.

Friday’s currency movement was in response to Erdogan’s comments about lowering rates gradually, said Jason Tuvey, senior emerging markets economist at Capital Economics.

“The fact that Erdogan called for gradual rate cuts is different from his previous comment about bringing down interest rates sharply,” he said. “While there will be severe cuts this year, the bank will have to reverse course next year or in 2021 if the lira comes under renewed pressure, or if the US imposes sanctions.”

‘Creep up again’

Erdogan, who frequently describes interest rates as “evil”, has said he fired former governor Murat Cetinkaya because he did not follow instructions regarding monetary policy.

This has led to renewed concerns about the central bank’s independence under Erdogan. Similar worries contributed to a sell-off of the lira last year – which sent the currency down nearly 30 percent annually. It has also declined some six percent this year.

Inflation, which hit a 16-year high in the wake of the lira crisis, declined to just below 16 percent in June, opening the door for the central bank to start easing for the first time in more than four years.

Erdogan repeated on Friday his unorthodox view that inflation will come down as interest rates are lowered, adding that he expects stronger economic recovery in the second half of the year.

Economist Tuvey said a loose monetary policy would certainly not help Turkey solve its inflation problem.

“Even though inflation will fall as the impact of last year’s currency crisis wears off, it may start to creep up again afterwards,” he said.

Central bank moving

Meanwhile, Turkey plans to begin transferring some units of its central bank and treasury to Istanbul from the capital Ankara over the next few months as part of a government effort to boost the city’s financial clout.

Most of the central bank’s functions, including its key decisions and operations, are expected to be relocated to Istanbul, the country’s largest city, within two years, sources told the Reuters news agency, adding that initial work on the move will start soon.

Reuters reported in April that units of the Ministry of Treasury and Finance, run by Erdogan’s son-in-law Berat Albayrak, were to be moved to Istanbul.

The plan was reportedly to move the bank and ministry to the now partially-built Istanbul Finance Center on the city’s eastern side, in Asia.

Central banks are typically located in capital cities – though there are exceptions such as the Reserve Bank of India, which is headquartered in Mumbai, not New Delhi.

Several Turkish public institutions, including the banking watchdog agency and state lenders, have already been moved to Istanbul in recent years.

According to the government’s plan, the central bank’s move is to be completed before early 2022, when the Istanbul Finance Center project is expected to be fully operational.

Source: Reuters