Category: Business

By JOE PARKINSON

ISTANBUL—Economists expressed dismay Wednesday at a pledge from Prime Minister Recep Tayyip Erdogan to strike back at an “interest-rate lobby” that allegedly seeks to stifle Turkish growth.

In comments late Tuesday, the Turkish leader also said market interest rates should be lower. High interest rates, he said, cause inflation—contrary to orthodox economic theory accepted around the globe.

“We will make the necessary sharp responses against the interest-rate lobby. We won’t let the interest-rate lobby work in comfort,” he told reporters in Ankara.

The Turkish leader hasn’t publicly outlined who he believes constitutes this lobby. But he is commonly understood to be referring to foreign parties—including investors, economists and journalists—who have called for a hike in Turkey’s benchmark policy rate in order to tame inflation and cool an overheating economy. Government ministers have suggested the call for higher rates comes from those who want to park their money in Turkey and “suck Turkey’s blood.”

Mr. Erdogan didn’t spell out a response or say who would mount it.

His intervention comes as economists covering Turkey say they are struggling to understand the country’s monetary policy, which they fear could drive its economy, which grew 8.2% in the third quarter of 2011, towards a hard landing and even recession later this year.

The stakes are high. The government’s electoral success and increased international clout are based largely on growing prosperity, successes that a sudden downturn could damage. Turkey, which conducts roughly half its trade with the European Union, has also been a rare bright spot among European economies.

“Markets find these comments a little disturbing…There’s absolutely no evidence of a speculative attack on the lira, or some foreign markets plot against Turkey,” said Tim Ash, chief emerging markets economist at RBS in London. “Worse, it comes as the market is increasingly confused by the central bank’s policy strategy; it’s either going to win them a Nobel Prize or it’s a road to nowhere.”

At issue, as inflation has risen above 10% for the first time in three years, is the central bank’s reluctance to raise its main policy rate. That benchmark overnight rate controls lending for all institutions, and now stands at 5.75 percent. Instead, the bank has employed a wider interest-rate corridor—a rate that it says will vary between 5.75% and 12.5%—that it can change daily, enabling it to tighten and loosen policy according to market conditions.

Turkish ministers have called for the policy rate to be equal to the rate of inflation—for a 0% real interest rate. In May, Mr. Erdogan said Turkey should have real interest rates at zero, prompting some economists to speculate the central bank has been keeping its policy rate artificially low to accommodate that goal.

The central bank didn’t respond to calls to comment on Mr. Erdogan’s speech.

Confusion over the central bank’s intentions, as well as imbalances in Turkey’s current account, have contributed to a rapid fall in the value of the Turkish lira. The central bank has attempted to stem that fall by spending scarce foreign reserves in currency-exchange market operations. The bank says it has spent has spent some $4.5 billion in the last week of December, bringing its reserves to $78.3 billion.

“However cruelly the interest-rate lobby works, the spending power of citizens of this country who consume declines by the same amount,” Mr. Erdogan said. Market interest rates should fall to the 5.75 percent policy rate, he said.

Lenders such as Garanti Bankasi AS are now charging Turkish borrowers as much as 20 percent annually for loans, up from a little over 10 percent a year ago, crimping consumers’ ability to borrow.

In a year when the government hopes to adopt a new constitution, likely in a referendum, any shadow over Turkey’s economy could pose a direct political threat to the government. Analysts say that could explain Mr. Erdogan’s finger-pointing at an alleged interest-rate lobby.

A spokesperson for the prime minister declined to comment. The government has been widely praised for implementing economic reforms that generated consistent high growth in recent years. The central bank also has supporters among Turkish economists for its unorthodox policies.

Markets shrugged off Mr. Erdogan’s comments early Wednesday, with Turkish assets rising on news that the economy’s bloated current-account deficit in November narrowed for the first time in more than two years. That finance gap, which now tops 10% of gross domestic product and is mostly funded by volatile short-term portfolio investments, is cited by investors as a key weakness for the Turkish economy.

What Mr. Erdogan says on interest rates shouldn’t matter, as Turkey’s central bank is legally independent, with a mandate to fight inflation and insuring financial stability. Speculation over the bank’s independence has risen since April, however, when the position of bank governor was filled by Erdem Basci, a childhood friend of Turkish economic czar Ali Babacan, a deputy prime minister.

The central bank has defended the economic logic of its decisions, stressing that policy has tightened significantly in recent months and that an unorthodox response—including keeping benchmark rates low, opening the flexible rate corridor and hiking banks’ reserve requirements to tame a gathering lending boom—was required to curb surging domestic demand and shore up the Turkish lira, which weakened some 20 percent against the dollar last year.

Mr. Basci last week hailed Turkey’s monetary policy as “the world’s most creative,” and forecast that the lira would be one world’s fastest-appreciating currencies in 2012. “Those who invest in the lira will gain in 2012,” he said. “As you sip your coffee, the Turkish lira will appreciate.”

Write to Joe Parkinson at joe.parkinson@dowjones.com

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