Turkish Central Bank avoids hinting rate cut at Cabinet meeting, but says ‘all is well’

ANKARA

Turkish Central Bank Gov. Erdem Başçı. AA Photo

Turkish Central Bank Gov. Erdem Başçı gave no signals of an immediate rate cut during a critical and much-anticipated presentation in front of Turkish Prime Minister Recep Tayyip Erdoğan on June 2, but sought to draw an optimistic picture of the economy.

Erdoğan, a harsh critic of high rates, has been vigorously slamming the bank for “insufficient rate cuts.”

During the one-and-a-half hour presentation he delivered to the Cabinet in Ankara, Başçı said tightening the monetary policy had prevented value loss in the Turkish Lira and that temporarily increasing short-term interest rates had been an effective weapon in the fight against inflation. 

The presentation at the Cabinet meeting was positive, broadcaster CNNTürk quoted Başçı as saying. “We will hopefully pull the inflation rate down.”

The prime minister has recently intensified the tone of his criticism against the Central Bank, slamming the institution for not reducing interest rates and hampering growth, which drew investors’ attention to yesterday’s presentation.

Daily Radikal columnist Uğur Gürses said Başçı’s presentation indicated he wanted to keep a foot in both camps.

“When looking at Başçı’s presentation, it looks like he opted for a discourse like ‘everything will be good, both inflation and interest rates will go down, Inshallah,” he wrote in a column on daily Hürriyet’s website after the release of the presentation’s content.

In several speeches, Erdoğan has described “reducing interest rates by half a point” as “kidding with the people” and declared that “we will do what needs to be done,” sparking investors’ fears over the independence of the Central Bank and its ability to operate without pressure.

Erdoğan also slammed the bank’s pledge to keep monetary policy tight until seeing a progress in high inflation, while claiming that high inflation stemmed from high rates as well, going against conventional wisdom.

In the presentation, Başçı said that although Turkey had been in a deflationary process, the weakening of the lira over the past year had played a role in the rise of inflation as well, tight monetary policy would come into play as inflation is expected to begin its descent this month.

The presentation also included some graphs showing the relation between inflation and policy interest rates in Japan, the United States, the European Union and the United Kingdom, which can be interpreted as a response to the prime minister’s constant reference to other countries to back his push for low interest rates.

On the contrary to Erdoğan’s suggestion, the graphs demonstrated that the inflation in these countries dropped only after the interest rates were raised.

In his remarks during the meeting, Başçı also presented an optimistic growth outlook, saying the pace of GDP growth was hovering at around 4 percent, the government’s target for year-end.

“The growth is expected to continue in 2014 with a more balanced pace,” he said, noting the balancing of the growth from the high levels of past years to moderate levels was continuing, as foreseen by the bank.

After growing at impressive levels of around 8 to 9 percent for years, Turkish growth slowed down to 2.2 percent in 2012 and 4 percent in 2013.

Leading global financial institutions have cut their estimations for Turkey’s year-end growth to well below the government’s target at a band ranging between 2 to 3 percent in the recent months.