Turkey needs huge rate hike, but politicians in the way: bank official

The Turkish central bank could raise interest rates by 1000 basis points, leading to a surge in the lira, but politicians are getting in the way, a senior Turkish central bank official said, according to Gazete Duvar writer Ozlem Akarsu Celik.

The central bank meets to decide on interest rates on Thursday. The official said an interest rate increase of such a magnitude would be among the options brought forward, Akarsu Celik said in an article for the website. She didn't identify the person, who she said was an experienced member of the institution.

“Right now there’s a patient bleeding heavily and emergency treatment is needed. A rate increase is the first thing you do in order to keep the patient alive,” the official said. “If they left it to us, the lira would be back at 5 per dollar."

The lira rose 0.3 percent to 6.40 per dollar at 11:43 a.m. in Istanbul on Wednesday.

“There could be a 2.5 percentage point (250 basis points) increase, five or ten too…If you ask me, realistically rates need to be 10 percentage points higher; it’s a necessity. But the political institutions won’t approve it.

“All of this will be discussed at the Monetary Policy Committee meeting on Thursday and a decision will be announced.”

Turkey’s lira has slumped about 40 percent against the dollar this year in what analysts term a currency crisis. While the lira’s losses accelerated in August during a political spat with the United States, the central bank didn’t raise its benchmark interest rate to defend the currency, which reached a record low of 7.23 per dollar last month.

Turkish President Recep Tayyip Erdoğan has resisted higher interest rates saying they are inflationary. He tightened his personal control over the central bank in July by making himself solely responsible for appointing the governor and his deputies, and reducing their terms in office to four years from five.

Central bank officials said Erkan Kilimci, an MPC member, resigned for personal reasons at the end of August, not because of a rumoured clash with Treasury and Finance Minister Berat Albayrak, who is a close friend, according to Akarsu Celik. Two officials said Kilimci wanted to replace Murat Cetinkaya as the bank's governor, she said.

Kilimci had returned to his office the weekend after he stepped down to obtain documents from his computer, but officials wouldn’t allow him to do so, according to the officials. Kilimci has now started work at Turkey’s Development Bank, but he won’t be there long, Akarsu Celik said, citing unidentified economy sources.

One economy official said that local wholesalers had said a month ago that they expect price increases of at least 50 percent for food and over 50 percent for paper products and cleaning materials. Those increases are expected to hit in September and October, the official said, according to Akarsu Celik.  

(Story updated with latest lira price in fourth paragraph, inflation in last.)