Jul 26 2019

Turkey’s Erdoğan says inflation will fall quickly after central bank rate cut

Turkish President Recep Tayyip Erdoğan said on Friday that he expected inflation to fall quickly after the central bank substantially cut its benchmark rate, pro-government Sabah newspaper reported.

The bank’s monetary policy committee on Thursday issued the biggest interest-rate cut since the ruling Justice and Development Party (AKP) came to power. The one-week repo rate was decreased by 425 basis points to 19.75 percent from 24 percent.

Economists said the decision showed Erdoğan’s influence on the central bank, after he sacked the former governor Murat Çetinkaya this month for failing to obey the government’s requests for rate cuts.

“Yesterday the central bank lowered the interest rate. What happened, have we gone bankrupt, has everything collapsed,” said Erdoğan. “This is not sufficient. This has to continue gradually till the end of the year,” he said.

Erdoğan, who is known for his unorthodox economic views, says higher interest rates cause inflation, the opposite of what classical economic theory states. 

“I see the central bank’s decision yesterday as an important turning point. With this we will see that inflation will start to decline quickly,” he said.

The central bank had kept the benchmark lending rate on hold at 24 percent since September, when it hiked it by 625 basis points to prevent a full-blown financial crisis. Many economists predicted a rate cut, as inflation in Turkey, which increased to a 15-year-high above 25 percent in October, fell to 15.72 percent year-on-year in June.

But many analysts saw the size of the rate cut as an important test for the central bank’s independence after Çetinkaya was dismissed.

The hefty rate cut is based on three pillars, said economist and Ahval contributor Güldem Atabay on Thursday. “Slowing global economic activity and the expected continuation of easy global monetary policy, along with still shrinking domestic demand in Turkey and of course the wishes of Erdoğan.”

The economy expanded 1.27 percent in the first quarter of 2019, after two quarters of negative growth. Economists warn that Turkey might experience a double-dip recession beginning by the second quarter of 2019.

Erdoğan said Turkish economy would continue to recover in the third quarter. 

https://www.sabah.com.tr/apara/haberler/2019/07/26/baskan-erdogandan-faiz-mesaji-yil-sonuna-kadar