Erdoğan: interest rates may go up but my policy remains same

Turkish President Recep Tayyip Erdoğan said that the appointment of Mehmet Şimşek as Treasury Minister should not be contemplated as a change in his cabinet’s economic policies as the former minister’s re-appointment to the post raised the expectations of a shift in low interest rate policy of Erdoğan. However he added that they “accept the steps he should take with the Central Bank,” hinting a possible hike in the rates.

“Some friends should not be under the misconception that ‘the President is going for a serious change in interest rate policies’. But at the point of the current thinking of our Minister of Treasury and Finance, we, of course, accepted that he should take the steps he will take here quickly and easily with the Central Bank, we said good luck, and in this way, we also declared our determination to reduce inflation to single digits,” Erdoğan said, answering the questions of journalists on the plane back from his Azerbaijan visit on June 13.

“We have no problems with banks. Our banking sector is already strong. But the whole point now is to make the financial management stronger and by making the financial management stronger, let’s bring down the decline in inflation,” he added.

Erdoğan sticks to “low interest rate”

The Central Bank of the Republic of Türkiye (CBRT) has been adhering to a stimulus policy keeping the policy interest rate low despite the soaring inflation in the country. Erdoğan long been defending “interest rates causes inflation” thesis and supports low policy rates to boost import-led growth. Turkish Lira continues to crash against foreign currencies as the CBRT’s foreign reserves saw historic low.

CBRT’s loyalty to Erdoğan’s policy has been raising criticisms over the bank’s autonomy as the governor has been changed 5 times in 4 years with the president’s decrees.

Şimşek, the former Minsiter, is known to object this monetary policy and his return to the Presidential Cabinet raised the expectations that Erdoğan may ease his strict policy choices.

After stating that “noone should be in misconseption” that he changed his position on his low interest rate policy, Erdoğan said “when I was prime minister, when we reduced (inflation) to single digits, the interest rate was 4.6 and inflation was 6.2. We did these things together then and we have said these things to our Minister now, we should do it together in the same way. We worked with the theory of ‘low interest, low inflation’ then. I work with the same understanding now, I have the same idea and I believe that we can achieve this in this way.”

What did he mean?

Erdoğan also said, “We are continuing to search for resources in the financial sector, and we will continue to do so.”

The President’s remarks were interpreted as a green light for an interest rate hike ahead of the Central Bank’s Monetary Policy Committee meeting on June 22.

However, Erdoğan says that the Central Bank may raise interest rates to help Şimsek in curbing inflation, but that this does not mean a change in his own economic policy.

At the same time, by emphasizing that Şimşek has authority over the Central Bank, he is also saying that the appointment of Gaye Erkan as the governor of the CBRT does not mean independence of the CBRT.

Thus, Erdoğan’s appointment of Şahap Kavcıoğlu, who was the target of criticism when he was the head of the Central Bank, as the head of the BRSA also made sense. With this statement, Erdoğan said, “Şimşek is in charge of the Treasury and the Central Bank, I pull the strings of the economy.”