Turkey’s prime minister said he’ll give the central bank’s emergency interest-rate increase time to succeed in halting a market slump, before trying alternative measures that he said are ready to be deployed.
Recep Tayyip Erdogan said his government will be “patient” as it waits to see the impact of the decision to raise all Turkey’s main rates, according to Hurriyet newspaper and other local media, which cited comments he made to reporters late yesterday during a plane journey back from Iran.
Erdogan said he won’t be able to maintain faith in the central bank’s policy shift unless it leads to a revival in the lira and the country’s stock market, and interest rates come back down. He said rates “aren’t the only instrument” and the government may announce its “plan B or plan C” within a few weeks, without giving details.
Turkey’s central bank raised the benchmark rate to 10 percent just after midnight yesterday, seeking to halt a run on the lira that drove it to record lows amid a local corruption scandal and a global retreat from emerging markets. It wasn’t immediately clear whether it succeeded, as the currency seesawed all day. Erdogan has opposed higher borrowing costs, which threaten to slow the economy as he prepares to fight two elections this year.
The lira dropped 0.4 percent against the dollar yesterday, after a session in which it gained as much as 4 percent and fell as much as 3 percent. Turkish stocks extended losses, with the benchmark index falling 2.3 percent to an 18-month low.
The Lira Reacts to Turkey's Continental Divide
Erdogan said the government wants to see “out-of-the-ordinary” measures to boost the economy, though he said it wouldn’t be right to reveal them immediately after the central bank’s action, according to Hurriyet.
The move by Governor Erdem Basci amounted to a tightening of 225 basis points, according to Royal Bank of Scotland Group Plc.
Fitch Ratings said it would help reduce Turkey’s “vulnerability to short-term capital outflows” and ease pressure on the currency and central bank reserves. Higher rates will also “dent domestic demand and could renew concerns about an economic ‘hard landing,’” Fitch said.
Erdogan’s Islamist-rooted party will contest local elections at the end of March, and Turkey is due to hold its first direct ballot for the presidency in August, amid speculation the premier may seek the post himself. He’s already fighting corruption allegations that threaten to erode support.
“The increase in rates is set to have a negative effect on growth, which will make life more difficult for Prime Minister Erdogan ahead of the intense electoral cycle,” said Wolfango Piccoli, managing director of political risk analyst Teneo Intelligence, in an e-mailed report. “As a result, pressure on the central bank is set to continue.”
There were immediate objections to the jump in borrowing costs among Erdogan allies. The business group Musiad, whose members have close ties to the premier’s party, called for measures to offset the impact on small businesses and jobs.
While growth in Turkey’s $800 billion economy picked up in the second and third quarters of last year, averaging about 4.5 percent, this year may be tougher.
JPMorgan Chase & Co. cut its 2014 forecast to 1.9 percent yesterday. Basci’s tightening will “hurt the short-term growth prospects” even as it stabilizes the lira, economist Yarkin Cebeci said.
Growth averaging more than 5.1 percent a year has cemented Erdogan’s appeal to Turkish voters during his 11 years in power.
The only time his party has failed to increase its share of the vote was also the only time the campaign was fought against the backdrop of a shrinking economy: the local elections of March 2009, when Turkey was suffering the effects of the global financial crisis.
By contrast, the lira slump of May and June 2006 -- which, like the current one, was driven by expectations of higher rates in developed economies -- soon reversed without hurting Turkish growth. Erdogan offered few objections to the emergency rate increases the central bank enacted to bolster the currency that year, when he didn’t face elections.
As in 2006, the Turkish central bank’s move this week has parallels in other emerging markets. South Africa, Brazil and India have all raised rates this month after currency slumps.
Erdogan regularly rails against an “interest-rate lobby,” blaming it for instigating anti-government protests last year, as well as the current graft scandal. On the plane back from Iran, he reiterated that he’s “always opposed to raising interest rates,” arguing that high rates fuel inflation rather than preventing it.
Yet the premier is “well aware” that he “wins elections because Turkey grows,” and that growth depends on foreign investment, said Soner Cagaptay, director of the Turkish Research Program at the Washington Institute for Near East Affairs.
“Money flows to Turkey because the country is deemed stable,” Cagaptay said in an e-mailed response to questions. “The issue long-term is not interest rates, but Turkey’s image as an economically and politically stable nation. If Erdogan can maintain that, Turkey could weather any economic downturn affecting the BRICS relatively unscathed.”
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