Turkey’s Erdogan Backs High Interest Rates in Surprise Move

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(Bloomberg) -- Turkey’s President Recep Tayyip Erdogan said “tight monetary policy” was needed to slow inflation, in an apparent change in stance for a leader who’s long frustrated investors by championing ultra-low borrowing costs.

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“We will lower inflation to single digits with the support of monetary tightening and improve the current-account balance,” he said as his government unveiled economic targets for the next three years.

The Turkish president, who won reelection in May to take his rule into a third decade, is known for being a self-proclaimed enemy of high interest rates. He’s removed three central bank governors in recent years for not toeing the line.

The lira initially gained after Erdogan spoke in Ankara, though later fell. It was trading 0.1% weaker at 26.8 per dollar as of 4.20 p.m. local time and is down more than 30% this year.

The short-lived rally suggests Turkey will need more than verbal signaling to win back investors after years of abrupt policy shifts that damaged credibility. Moreover, Turkish interest rates remain among the most negative in the world when adjusted for inflation, despite recent hikes.

Erdogan revamped his economic team shortly after his election victory, appointing Mehmet Simsek, a former Merrill Lynch bond strategist, as finance minister and Hafize Gaye Erkan, who used to work at Goldman Sachs Group Inc., as central bank governor.

Supersized Rate Hike Spurs Massive Rally Across Turkish Markets

The duo has overseen a sharp rise in rates and an unraveling of state controls over financial markets since June. But Erdogan had, until now, insisted views on monetary policy were unchanged.

“People shouldn’t be under the misconception that the president is moving toward a serious change in interest-rate policies,” he said on June 14. “I’m the same.”

His latest comments are a signal he’s “very supportive” of Simsek and Erkan, according to Timothy Ash, an emerging-markets analyst at RBC Bluebay Asset Management. Still, it’s possible that “the economic challenges are now just too difficult even from the A team to resolve.”

Turkey needs “much higher” rates and to quickly get an “external anchor” in the form of funding from the International Monetary Fund or Gulf states, according to Ash.

Erdogan’s Fixation

The president’s fixation with a growth-at-all costs strategy and push for low rates triggered a surge in inflation and caused investors to flee the country. Price growth has slowed since reaching 86% in October, but it’s still almost 60% and quickened again in July and August.

The current benchmark interest-rate is 25% after the central bank raised it by 750 basis points — more than expected — in late August. It’s signaled there’s more tightening to come.

On Wednesday, Erdogan said his administration would curb consumer demand. But he won’t “make concessions on economic growth,” he said, as the government revised down its targets in a Medium-Term Program presented around the same time.

Turkish Economy Slows Less Than Forecast as Rate Hikes Loom

Turkey is scheduled to hold local elections in March. The president has for years boosted monetary stimulus ahead of polls and wants to win back the biggest city of Istanbul, now held by the opposition.

Gross domestic product will expand 4.4% this year, down from the forecast of 5% in the previous report, according to a presentation by Vice President Cevdet Yilmaz. And for next year, the government now sees the $900 billion economy rising 4%, compared to 5.5% before.

Those figures are “slightly optimistic,” analysts at Turkish Oyak Securities said, without elaborating.

Pessimistic Outlook

The government offered a pessimistic outlook on inflation. It revised up its year-end projection to 65% from 25%.

Year-on-year inflation rate rose faster-than-expected in August, to 58.9%, underscoring the central bank and Erdogan’s challenge in ending Turkey’s cost-of-living crisis.

Turkish Inflation Nears 60%, Piling Pressure on Central Bank

The central bank amended its year-end inflation forecast to 58% in July, more than doubling it from the figure under Governor Erkan’s predecessor.

Monetary authorities expect price growth to peak in the second quarter of next year and slow to 33% at the end of 2024. The 2025 year-end projection is 15%.

Those inflation forecasts for the next two years are in line with the government’s.

--With assistance from Asli Kandemir, Ugur Yilmaz and Kerim Karakaya.

(Updates with analyst comments and details throughout.)

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