Turkish President Recep Tayyip Erdogan’s influential ruling coalition partner said Tuesday that the government needed to take “painful” economic recovery measures that included interest rate hikes reported Barrons.
MHP party leader Devlet Bahceli’s comments delivered important political cover for Erdogan’s new economic team to pursue a more conventional approach to cure Turkey’s accumulating woes.
Turkey’s annual inflation rate hovers near 40 percent and its central bank reserves stand at historic lows after two years of Erdogan’s unorthodox economic policies.
Erdogan appointed market-friendly economist Mehmet Simsek as finance minister and former Wall Street executive Hafize Gaye Erkan as the head of Turkey’s central bank after winning a hard-fought re-election last month.
Both have promoted conventional policies that include interest rate hikes to combat inflation — the opposite of the approach favoured by Erdogan.
The Turkish leader said last week that he “accepted” the changes that his new economic team would like to pursue.
But Erdogan added that he still believed that high interest rates contribute to inflation and that his views on economics have not changed.
Bahceli echoed those remarks.
“The MHP’s view on interest rates is clear, it has not changed. In theory and practice, an increase in interest rates is a political choice that discourages investment, hinders production, and makes the need for credit more expensive,” he told his party members in parliament.
“However, there are short-term and sometimes painful measures that need to be taken for Turkey to achieve economic stability, and it has become inevitable to bear the current burden.”
Bahceli’s remarks come two days before the central bank holds one of its most important policy meetings in years.
Erdogan sped through a series of central bankers before finding one willing to push down the policy rate well below that of inflation.
A resulting currency crisis set off a new wave of inflation that saw consumer prices grow at an annual rate of 85 percent late last year.
Turkey’s main interest rate now stands at 8.5 percent — still 31.1 percentage points below the annual rate of inflation.
Analysts see Thursday’s meeting as a litmus test for how much leeway Erkan has to raise rates.
Bahceli plays an outsized role in Turkish politics despite representing a fringe ultranationalist party that picked up 10 percent of the vote in last month’s polls.
His alliance with Erdogan has enabled the president’s Islamic-rooted AKP parliament to control parliament and push through policies without the need for the opposition’s support.
Following the alteration in economic administration subsequent to the elections, the initial interest rate determination of Turkey’s Central Bank (TCMB) will be announced on June 22. Projections from international financial institutions expect the new cadre to declare the policy rate as 20 to 40 percent.
An interest rate hike to 25 percent from the current 8.5 percent is on the cards for Turkey’s Monetary Policy Committee’s upcoming meeting on June 22, “if not earlier,” JPMorgan economists said on Monday.
“A policy rate hike to 25 percent, from the current level of 8.5 percent, is on the table for 22 June or earlier, along with forward guidance suggesting smaller rate hikes if needed,” the Wall Street bank said to clients in an economic research note. “We maintain our year-end policy rate forecast at 30 percent.”
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