Istanbul: 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 high interest 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.
The central bank pushed up the cost of borrowing this week but left its policy rate on hold in an unorthodox move that disappointed investors hoping for a significant rate hike to support the lira.
Erdogan’s comments are likely to deepen investor concerns about government pressure on the central bank. Ratings agency Fitch downgraded Turkey’s sovereign debt to “junk” late on Friday, snuffing out its last remaining investment grade.
That cut came hours after rival agency Standard & Poor’s surprised investors by lowering its outlook for Turkey to “negative” from “stable”. The moves by both agencies underscore the uncertainty about politics and monetary policy in what was once a star emerging market.
“Political and security developments have undermined economic performance and institutional independence,” Fitch said. “Undue influence on the central bank has prevented it from hitting its inflation target.”
Monetary policy
Erdogan’s comments weighed on the lira, which fell as far as 3.9115 to the US dollar on Friday, approaching its all-time low of 3.9417.
“The market’s concern with regard to monetary policy independence is negatively affecting lira today,” said Ibrahim Aksoy, HSBC Asset management strategist in Istanbul.
“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 not only with orthodox economics but also 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 per cent and its late liquidity window rate by 1 percentage point to 11 per cent 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.
