Bloomberg News

Erdogan Vows to Fight Turkish ‘Rates Lobby’ as Yields Surge

January 12, 2012

(Updates with economist comment in eighth paragraph, closing bond prices in ninth.)

Jan. 11 (Bloomberg) -- Prime Minister Recep Tayyip Erdogan said Turkey will make “strong, pointed responses” to a lobby he said is pressing for higher interest rates, as surging borrowing costs threaten to pare economic growth.

“The interest-rate lobby is working and on the attack right now,” Erdogan said in Ankara, according to state news agency Anatolia. “We won’t let the lobby work in comfort” because their success means “the spending power of citizens of this country who consume declines.”

The central bank has more than doubled the cost of funding it provides to banks to curb a slump in the lira and cap inflation that accelerated to a three-year high of 10.5 percent last month. Banks such as Turkiye Garanti Bankasi AS are charging borrowers as much as 20 percent annually, from a little over 10 percent a year ago. The economy may slide into recession in early 2012, Goldman Sachs Group Inc. said last month.

Erdogan said the gap between the central bank’s benchmark interest rate of 5.75 percent and market rates must close because “however high the market rate is, inflation will be that high,” Anatolia reported. “The lower we can bring market rates, the slower inflation will be.”

Close to Zero

Erdogan and Economy Minister Zafer Caglayan say the “interest-rate lobby” is trying to force Turkey to raise rates to help create higher returns. Erdogan said last May that real rates, after inflation, should be close to zero.

Economists such as Mert Yildiz at Renaissance Capital say the lobby doesn’t exist and the government is finding an enemy to deflect blame for its economic policy decisions.

Erdogan’s comments “tend to raise concern again over the independence of” the central bank, Tim Ash, chief emerging- market economist at Royal Bank of Scotland Plc in London, said in an e-mailed note today.

The premier’s comments probably won’t influence central bank policy, Bulent Topbas, fund manager at Strateji Menkul Degerler in Istanbul, said by e-mail. “If you don’t want high inflation, interest rates have to rise to stabilize exchange rates. Facts of the economy restrict wants.”

The decline in the lira and accelerating inflation have helped make yields on Turkey’s two-year bonds the highest among 19 major emerging markets tracked by Bloomberg. Yields rose 6 basis points to 11.43 percent at 5:00 p.m. in Istanbul today. They were about 7 percent a year ago. Hungary follows with 9 percent and India with 7.8 percent. The inflation rate in Turkey is also the highest among its peers.

Lira Decline

The lira gained 0.4 percent to 1.8609 per dollar. The currency reached a record low of 1.9219 per dollar on Dec. 28 and fell 18 percent last year, the biggest decline among the main global currencies.

“Unfortunately, with the market rate approaching 14 percent recently, you have seen that inflation jumped to about 10.45 percent,” Erdogan said, according to Anatolia.

Central bank Governor Erdem Basci has attributed the acceleration in inflation to the declining lira and government tax increases.

The central bank knows its job and has acted to support the lira by selling dollars on the market, Erdogan said. “It may do so again,” he said.

--With assistance from Selcuk Gokoluk in Istanbul. Editors: Ben Holland, Karl Maier, Louis Meixler, Digby Lidstone.

To contact the reporters on this story: Steve Bryant in Ankara at sbryant5@bloomberg.net; Mark Bentley in Istanbul at mbentley3@bloomberg.net

To contact the editors responsible for this story: Andrew J. Barden at barden@bloomberg.net; Riad Hamade at rhamade@bloomberg.net


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