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Turkish premier criticizes central bank over interest rates

ANKARA: Turkish Prime Minister Recep Tayyip Erdogan said Tuesday he hoped the central bank would cut interest rates further, criticizing its stance and raising further concerns about political interference in monetary policy.

The bank trimmed rates for the first time in a year last month despite high inflation after calls for a cut from Erdogan, who is eager to maintain economic growth ahead of an August presidential election and parliamentary polls in 2015.

Erdogan is widely expected to run in the presidential election but has yet to announce his candidacy.

Speaking to reporters a day after Central Bank Governor Erdem Basci defended central bank (CBRT) policy in a biannual presentation to the Cabinet, Erdogan said the latest data showed inflation was not falling.

“I do not find his approach concerning interest rates at all positive and I do not accept it,” Erdogan said, asserting that high interest rates were the cause of high inflation.

“I hope that new steps are taken immediately and this issue is resolved,” he said.

There was little sign of market reaction to Erdogan’s comments, which were in line with his previous statements, and the lira was steady at 2.1082 against the dollar.

Timothy Ash, head of emerging markets research at Standard Bank in London, said markets have so far been tempted to discount Erdogan’s unorthodox views on monetary policy as aimed at a particular domestic audience.

“But the sheer scale and extent of Erdogan’s commentary now could become a serious concern for the market, if it begins to force personnel changes at the CBRT itself,” Ash said.

“It surely is testing the patience of central bankers at the CBRT – they have a difficult enough job fighting inflation, and figuring out a monetary policy stance, without trying to second guess the prime minister,” Ash said.

Data Tuesday showed Turkish inflation rose less than expected in May, but the annual increase stayed above the central bank’s forecast for the end of the year, bolstering its case for keeping monetary policy tight.

Consumer prices rose 0.4 percent month-on-month in May, less than a Reuters poll forecast for a rise of 0.5 percent, for a year-on-year increase of 9.66 percent, data from the Turkish Statistics Institute showed.

The central bank surprised markets last month when it cut its one-week repo rate, the main rate at which it funds the market, by 50 basis points to 9.5 percent.

Erdogan said the cut was not enough. Economy Minister Nihat Zeybekci added to the pressure on the bank Tuesday by saying it should cut rates in line with falling market yields.

Deputy Prime Minister Bulent Arinc played down concerns about political interference after Monday’s Cabinet meeting, saying the government believed in an independent central bank and would not interfere in monetary policy.

The bank raised rates sharply at the end of January to combat a fall in the lira to record lows, ignoring political pressure to keep rates down.

In his presentation to the Cabinet, Basci said a “temporary tightening in short-term interest rates” had been an effective tool with which to fight inflation and that a fast depreciation in the lira had also been prevented as a result.

Basci had said in April he saw room for a gradual lowering in rates but ruled out a deep cycle of easing. Policy would stay tight until there was a clear improvement in the inflation outlook, he said.

 
A version of this article appeared in the print edition of The Daily Star on June 04, 2014, on page 6.

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Summary

Turkish Prime Minister Recep Tayyip Erdogan said Tuesday he hoped the central bank would cut interest rates further, criticizing its stance and raising further concerns about political interference in monetary policy.

Speaking to reporters a day after Central Bank Governor Erdem Basci defended central bank (CBRT) policy in a biannual presentation to the Cabinet, Erdogan said the latest data showed inflation was not falling.

Data Tuesday showed Turkish inflation rose less than expected in May, but the annual increase stayed above the central bank's forecast for the end of the year, bolstering its case for keeping monetary policy tight.

The central bank surprised markets last month when it cut its one-week repo rate, the main rate at which it funds the market, by 50 basis points to 9.5 percent.


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