ERDOGAN SAYS HIS PATIENCE ON CENTRAL BANK POLICY HAS LIMITS

The Central Bank (CBRT) increased its one-week repo rate on September 13 to 24 percent, a jump of 625 basis points that was almost double what forecasters expected. The surprise move buoyed markets that had been mired in a slump for months, triggered by a diplomatic row with the U.S. and then amplified by Central Bank inaction.

Before the Central Bank’s decision in Ankara, the run on the currency forced it to raise rates where it could without further damaging the prospects for economic growth. The Bank increased the cost of cash to commercial lenders by around 150 basis points last month by forcing them to use a borrowing tool costlier than the one-week repo rate.

Taking that into account, the latest hike will result in an additional tightening of 475 basis points, somewhat less than the headline number suggests. What’s more, the initial reaction to the increase from local investors shows the currency still faces an uphill struggle.

‘Total Chaos’

Earlier in the day, Erdogan sowed confusion throughout the business community by publishing a decree making the lira the only currency that can be used in contracts between Turkish entities. Many of his government’s own contracts, including for building motorways and operating airports, are currently priced in dollars or euros. All agreements that are either priced in or indexed to foreign currencies will have to be amended within 30 days, though some will be exempt, according to the decree. The government has yet to clarify the new rules. The measure will create “total chaos” and probably can’t be implemented within the allotted time frame, said Hulusi Belgu, head of the national shopping-mall association. He said his industry has $15 billion of debt and 70 percent of all rent contracts are priced in foreign currency. It’s common in Turkey, a country that’s long struggled to contain inflation, to index prices in dollars or euros for everything from cars to legal services. About half of the Turkish banking system’s deposits are in foreign currencies.

‘My friend’

Erdogan told a group of craftsmen and merchants that Turkey is fighting an economic war and tough times require tough measures. He was speaking in a televised address after the decree on contracts was published and before the rate decision was announced.

“Anyone who is not involved in exports or imports shouldn’t see his path intersect with foreign currencies,” the president said.

Erdogan also used his speech to attack the Central Bank for consistently missing its inflation targets, and faulted policy makers for failing to see what he considers to be the true relationship between the cost of credit and consumer prices. “Interest rates are the cause and inflation is the result,” the Turkish leader said. “If you think inflation is the cause and interest rates are the result, it means you don’t know about this matter, my friend.”

Erdogan resumed his criticism of the nation’s Central Bank a day after it announced the biggest rate hike of his rule. “I am remaining patient but there is a limit to this patience,” Erdogan told members of his ruling AK Party in Ankara on September 14. He restated his opinion that higher rates won’t help to slow inflation and warned that his restraint won’t last forever.

The Central Bank was responding to repeated calls for a rate increase, Erdogan said, and responded with a “quite” big hike. Turkey would see the “results of the independence” of the regulator, he said.

The lira erased gains on the comments and was trading 0.4 percent lower at 6.1058 per dollar at noon in Istanbul.