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Erdogan demands drop in interest rates

4 April 2014

Turkey’s lira weakened on Friday after Prime Minister Erdogan said that central bank should cut interest rates, only a day after the bank’s governor had said fighting inflation remained a priority and rates at existing levels would do the job.

The Prime Ministers announcement once more calls into question the independence of central bank as investors have long feared the government would exert pressure on the central bank to keep rates artificially low as it approaches the presidential elections in August 2014. Analysts have warned how detrimental this would be to Turkey’s struggle against inflation and external imbalances.

Following local elections in Turkey, which gave clear support to the ruling AKP, the lira rallied. Speaking to reporters five days later, Erdogan said: “As soon as the local election results were announced, markets started to react positively. The stock exchange climbed above 70,000. Yields are falling.”

In line with this, the central bank will probably convene an extraordinary Monetary Policy Committee meeting, and this time it should lower interest rates.”

In an effort to stabilise the plummet lira, in January the bank, after an emergency meeting, was forced to make a massive rate hike in interest rates. A move made too late according to many analysts.

PM Erdogan’s remarks on lowering interest rates have been criticised by analyst Tim Ash of Standard bank who said: “Suffice to say very negative and disruptive comments – politicians should steer clear of making such specific comments over monetary policy in countries which are supposed to operate with independent central banks”.

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