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Sep 14 2018

Erdoğan will be patient with the central bank, for now

Turkish President Recep Tayyip Erdoğan said he will be patient with the central bank “for now” after it raised interest rates against his wishes.

“But my patience has its limits,” Erdoğan said in a speech on Friday. “Independence is independence, they said. Go on, take your independence.”

Erdoğan spoke after policymakers shocked investors with a 625 basis-point interest rate increase on Thursday, raising its benchmark to 24 percent in an effort to steady the lira and tame inflation. The Turkish president had spoken immediately before the decision, warning that higher interest rates caused inflation in contradiction with commonly-held economic theory.

Analysts have welcomed the move by the central bank as a sign that Turkey can overcome a currency crisis that saw the lira slump by 40 percent against the dollar this year. Analysts have speculated that Erdoğan, despite his protests, gave the go-ahead for the rate increase, but won’t admit it publicly as he prepares to fight local elections in March.

Erdoğan also called on Turks to hold liras rather than foreign currency, saying those who demand dollars should be reported to the authorities.

The lira fell 0.3 percent to 6.1 per dollar at 12:32 p.m. in istanbul, partly erasing gains of more than 3 percent on Thursday.

Turkey is continuing its search for foreign capital to help improve its finances, Erdoğan said, reiterating his belief that the slump in the lira was part of a foreign conspiracy against Turkey.

Investors, who say Turkey may need IMF assistance as it battles a likely recession, are now looking to the government to take steps to back the central bank’s monetary tightening, including cuts to the budget.

Erdoğan said the government would make savings and no new investment projects would be started, but it would continue with the country’s economic transformation, which has been marked by huge investments in infrastructure.

Earlier on Friday, Treasury and Finance Minister Berat Albayrak said he would announce Turkey’s new Medium Term Program on Sept. 20. The government will focus on slowing inflation of 17.9 percent and ensuring that interest rates on loans decline from “unrealistic” levels, he said.

The government will make an adjustment of 35 billion liras ($5.75 billion) in the budget through spending cuts and revenue-raising measures by the end of the year to keep the budget deficit at less than 2 percent of GDP, Albayrak said in comments carried by the Sabah newspaper and other local media.

Turkey will also focus on reducing the current account deficit by reducing exporter’s reliance on imported intermediate goods and substituting them for local products, Albayrak said.

Erdogan also said, "whoever demands foreign currency should be reported to the relavant authority."