Top Erdoğan adviser sees more rate cuts, shrugs off inflation worries

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Turkey is likely to cut interest rates again this month, a top adviser to President Recep Tayyip Erdoğan said on June 14, heaping more pressure on the Central Bank and shrugging off concerns about inflation and investor flight.

“We welcome the Central Bank’s gradual rate cutting process and I think that the bank will continue cutting rates this month,” Bülent Gedikli, a chief adviser to Erdoğan on the economy, said in an interview in his office in the presidential palace.

The bank’s monetary policy committee has cited the need for “simplification” - the movement toward a single interest rate to set policy - as a justification for cutting, as well as the downward trend in inflation.

The Central Bank has cut its overnight lending rate, the highest of the multiple rates it uses to set policy, by a total of 125 basis points over the last three months to 9.5 percent, as inflation, particularly food inflation, cooled.

Yet inflation is still above the bank’s 5 percent target. Last month it was at 6.58 percent. Core inflation, which excludes volatile food and energy prices, was at 8.8 percent in May, down from 9.4 percent in April.

“There is no more upward pressure on inflation. Year-end inflation is likely to be around 6 to 6.5 percent under these circumstances, and the trend in core inflation is also downward,” Gedikli said.

However, some economists are more cautious. William Jackson of Capital Economics in London said the rate cuts may not be justified given core inflation remains near 9 percent, suggesting underlying pressures are strong and headline inflation could top 8 percent next year.

“That could come as a shock to investors and it will erode households’ real incomes and dampen consumption,” he said.

Erdoğan favors consumption-led growth and investors have worried that he is strengthening his grip on the economy after the ouster of Ahmet Davutoğlu as prime minister last month. Davutoğlu, who was seen as closer to a more orthodox economic stance, was replaced by Binali Yıldırım.

“Political pressure for looser monetary policy is likely to continue,” Capital Economics’ Jackson said.

Gedikli dismissed concerns that foreign investors could sell Turkish assets. 

The negative global environment provides two positives for Turkey, Gedikli said: An abundance of liquidity from global stimulus and lower energy prices. Turkey is dependent on imports for nearly all of its energy needs.

“I have been laughing at those who say cash won’t come. Where else it will go? Europe is awash with money. They have to give it to our banks,” Gedikli said.

“There is an abundance of cash and Turkey would have no problem finding money. It will flow. The dynamism, the mobility is here,” he added.