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Erdogan sticks to ‘low inflation, low rate’ policy

Tie, Accessories, Accessory REUTERS/Marko Djurica
Erdogan said he is determined to lower inflation, which dropped to just below 40% in May, to single digits

Turkish President Tayyip Erdogan said his newly appointed finance minister Mehmet Simsek will take unspecified steps swiftly with the central bank, but that it was a mistake to suggest Erdogan had changed his own views on interest rates.

Since winning re-election last month, Erdogan, a self-proclaimed “enemy” of interest rates, has appointed Simsek as well as a new central bank governor, Hafize Gaye Erkan, in moves seen as heralding a switch to tighter interest rate policy.

“Some of our friends should not be mistaken, such as (asking) ‘Is our president going for a serious change in interest rate policies?'” Erdogan told reporters on a return flight from Azerbaijan on Tuesday, according to a readout of his comments published by Turkish media on Wednesday.

“But upon the thinking of our treasury and finance minister, we have accepted that he will take steps swiftly, comfortably with the central bank,” Erdogan said.

His comments suggested that he had given the green light for interest rate hikes by the central bank, which has slashed its policy rate from 19 percent in 2021 to 8.5 percent, even as inflation touched a 24-year high of 85.5 percent in October last year.

Analysts at leading investment banks now expect Turkey’s central bank to start ramping up rates at its monetary policy committee meeting on June 22.

Erdogan said he is determined to lower inflation, which dropped to just below 40 percent in May, to single digits, adding that he maintains his “low inflation, low interest rate” policy.

Erdogan said he told the new central bank governor about his expectations.

“God willing, neither our finance minister nor our central bank governor will embarrass us and I think we will hopefully obtain positive results.”

The rate-cutting cycle was driven by Erdogan’s policies based on the unorthodox view that high interest rates stoke inflation. The policy caused a lira crisis in 2021 and led the currency to shed 44 percent that year and 30 percent in 2022.

Authorities have tapped the central bank’s reserves to counter demand for forex and stabilise the currency. But the lira is already down some 20 percent this year, sharpening its fall as Ankara began to loosen its grip on forex markets following Erdogan’s victory in last month’s elections.

Expectations that Ankara would return to orthodox policies strengthened after Erdogan appointed Simsek, who is highly regarded by markets, to the finance ministry and Erkan, a former Wall Street banker, to the central bank.

Turkish authorities are now hoping foreign investors will return after a years-long exodus, but market watchers cautioned that Erdogan turned to conventional policies in the past only to change his mind shortly after.