Turkish President Tayyip Erdogan declared his opposition to the central bank’s interest rate corridor policy in comments reported on Friday and reaffirmed his view that interest rates cause inflation, “not tomatoes, not pepper”.
His remarks to journalists on his plane returning from a trip to Africa suggested Erdogan was not going to let up on criticism of monetary policy even as the lira languishes near record lows, partly on concern about central bank independence.
The central bank uses a “corridor” of multiple borrowing and lending rates to adjust monetary policy and has faced pressure from Erdogan, a fierce opponent of highi nterest rates, to keep credit costs down to boost flagging growth.
“I am somebody who defends the ending of the floor and ceiling interest rate and just leaving the policy rate,” the mass circulation Hurriyet newspaper cited Erdogan as saying.
“Raising interest rates influences the exchange rate and inflation in a negative way,” he said when asked about his views on the central bank’s latest policy moves and lira weakness.
Unorthodox move
Erdogan’s comments put further pressure on the lira, already weighed down ahead of a review of Turkey’s sovereign rating by the ratings agency Fitch on Friday evening, with investors mulling the possibility that it could downgrade the rating to “junk”.
The lira slipped 0.6 percent to 3.8810 against the dollar by 0915 GMT, approaching its all-time low of 3.9417. The main share index rose 0.25 percent and the 10-year bond yield rose to 11.43 percent from 11.36 on Thursday.
Monetary policy
“After President Erdogan’s comments, the market may further question the effectiveness of the CBRT’s liquidity and swap operations on the lira,” he added, referring to the central bank.
The government has sought to tame spikes in volatile food prices in recent months, but Erdogan appeared to play down the issue, voicing a stance on interest rates at odds with orthodox economics and also at odds with the mandate of his own central bank.
“Interest rates are the cause, inflation is the result. Don’t look anywhere else. Not tomatoes, not pepper, it’s all claptrap. The main cause of this is interest rates,” he was quoted as saying.
Turkey’s central bank law mandates that the bank’s primary objective is to maintain price stability. Central banks traditionally use interest rate increases to rein in prices.
However, Turkey’s central bank has lately resorted to other, less effective tools to drive up borrowing costs. Such moves, dubbed “covert tightening” by some economists, have heightened the perception the central bank may be less than independent, some market participants have said.
The central bank raised its overnight lending rate by 75 basis points to 9.25 percent and its late liquidity window rate by 1 percent to 11 on Tuesday, lifting borrowing costs at the two main channels through which it is now funding the market.
The latest moves came after efforts by the bank to implement a simplification of policy last year, narrowing the interest rate corridor with the aim of moving towards a single rate.
