Monetary policy watchers the world over keep wondering when interest rates will rebound already. Anyone sharing that gripe with Erdem Basçi, governor of the Central Bank of Turkey, might get a knowing glance. Generally speaking, one sure-fire way to rein in inflation is to raise rates. Thanks to a domestic political squabble, though, Basçi has been left to find another antidote.
Turkish President Recep Tayyip Erdogan (ironically, his last name means “male hawk”) has been at odds with Basçi lately. Erdogan wants to keep interest rates down in a bid to stimulate borrowing, having gone so far as to call the 48-year-old economist a “traitor” for considering going against him.
Earlier this year Basçi and Erdogan seemed to have reached an accord, however temporary, with the former agreeing to lower rates at the Turkish central bank’s January and February monetary policy meetings. In the meantime, the country’s consumer price index crept up, from 7.24 percent in January to 7.55 percent in February, well above the 5 percent official target.
On March 11, Basçi tweeted a picture of him standing beside Erdogan, followed by another tweet saying that he and “the esteemed president stood above our sensitivities on the direction of interest and production.” But less than a week later, at Turkey’s most recent monetary policy gathering, he kept the benchmark one-week repo rate steady at 7.5 percent. Consumer prices rose 1.19 percent in March, the biggest monthly spike since March 2003, lifting the year-over-year inflation rate to 7.61 percent.
As Basçi and Erdogan butt heads, the Turkish lira is plummeting against the U.S. dollar. Observers are skeptical that the nation’s central bank is keeping its independence from the president; Investment outflows from emerging markets and ongoing nervousness about the U.S. Federal Reserve Board’s expected start of rate normalization later this year haven’t helped the currency either.
Since the start of the year the lira has skidded by nearly 9 percent, hitting an all-time low of almost 2.69 versus the greenback on April 14. For the central bank, this is new territory.
Notwithstanding the March pause, Basçi is expected to drop rates at the next policy meeting on April 22. Macroeconomists who aren’t feeling the pinch of Erdogan’s thumb might be happier if he took the high road.
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Follow Anne Szustek on Twitter at @the59thStBridge .
