Turkish business group warns against early rate cuts, chase for growth

The Turkish Industry and Business Association (TÜSİAD) warned the authorities against a swift cut to interest rates, saying the focus should be on defeating inflation, lowering country risk and achieving sustainable economic growth.

Turkey is about to go through a critical period during which patience is required, TÜSİAD Chairman Simone Kaslowski said in an interview with the Dünya newspaper published on Tuesday. TÜSİAD represents Turkey's biggest companies.

“If we want permanent rate cuts, we must first reduce inflation structurally," he said. "First of all, we need to lower the country risk premium. Financial stability and predictability are needed to lower that risk premium. Every road goes through price stability."

Consumer price inflation in Turkey accelerated to 18.95 percent in July, just short of the central bank’s benchmark interest rate of 19 percent. President Recep Tayyip Erdoğan has called for rate cuts, saying he expects inflation to have slowed during August. Erdoğan has sacked three central bank governors in less than three years.

“While inflation expectations are rising in Turkey and interest rate cuts are on the agenda, I think we have entered a critical 4-5 months in which we must act patiently, not hastily,” Kaslowski said.

He spoke ahead of the publication of second-quarter economic growth data on Wednesday. Some economists are predicting double-digit annual growth for Turkey.

“Sustainable economic growth is required, not short-term, high growth,” Kaslowski said. “Without this, investments and production fluctuate, income is unevenly distributed, and you cannot create permanent employment.

“When this situation is combined with inflation, the citizen cannot feel economic growth in his own pocket. Growth needs to be inclusive.”

The central bank is due to meet to decide on interest rates on Sept. 23. August inflation data will be published on Friday.

Turkey’s central bank has kept interest rates on hold since Erdoğan sacked and replaced its governor in March, even as inflation gathered pace. Expectations for future inflation have since deteriorated as investors began to bet on early interest rate reductions and more pro-growth economic policies.

Erdoğan says high interest rates are inflationary, a view that contradicts with conventional economic theory that states rate hikes can be used to slow price increases. Turkey’s inflation rate is the highest in major emerging markets outside of crisis-hit Argentina.

Lax monetary policy has spurred inflation and led to an increase in demand for imported goods such as televisions and mobile phones. A surge in imports last year widened the current account deficit to more than 5 percent of GDP and pushed the lira to successive record lows against the dollar.

Turkey’s trade deficit increased at the fastest pace since November during July, the Turkish Statistical Institute said on Tuesday. The trade gap increased by an annual 51.3 percent to $4.28 billion, as a 16.8 percent increase in imports outpaced a 10.2 percent expansion in exports.