Turkey Official Says Zero Rates an ‘Ideal’

The Wall Street Journal  (USA) November 24, 2011, p. 6               Türkçe

By Marc Champion and Joe Parkinson, Istanbul

Turkey’s economy czar Ali Babacan on Wednesday waded into a furious debate over an ideological policy of targeting zero real interest rates, saying this was an « ideal, » but that achieving it was constrained by markets.

The deputy prime minister’s comments came as Turkey’s central bank again kept its policy rate at a record low of 5.75% at a meeting of its monetary policy committee Wednesday. Shortly afterwards, Fitch ratings agency lowered Turkey’s outlook to stable from positive, triggering a drop in the Turkish lira.

Fitch cited the challenge Turkey faces of reducing inflation and its large current-account deficit against the backdrop of a deteriorating global economy, though it also praised Turkey’s strong fundamentals.

Ever since Prime Minister Recep Tayyip Erdogan said in May that Turkey should have real interest rates at zero — a level equal to inflation — economists have speculated the nation’s central bank has been keeping its policy rate artificially low to accommodate that goal.

« In effect, we have to zero the real interest rate, this should be our goal, this is what we should achieve, » Mr. Erdogan told a meeting of the business lobby TUKSON at the time. « So we have to . . . not make money from money but, quite the opposite, to gain power from production and investments. »

« God willing, we will establish [zero real interest rates] in all economic areas, and among all actors, in the financial as well as real sector, » Mr. Erdogan said.

What Mr. Erdogan says on interest rates shouldn’t matter, as Turkey’s central bank is independent. The bank has defended the economic logic of its policy, saying low rates are needed to maintain growth in the teeth of an impending recession in Turkey’s largest export market, the European Union.

Some economists — like Fitch on Wednesday — have worried aloud that the central bank and government are too sanguine about inflation and the current-account deficit, which is running as high as 10% of gross domestic product. On Tuesday the central bank nudged its end of year inflation forecast up to 9.2%, well above the bank’s 5.5% target.

Some of these economists say they have come under pressure for criticizing the bank for keeping rates too low, especially after Economy Minister Zafer Caglayan in July accused them of trying to force interest rates up so they can « earn more money on Turkey. »

Economists say their criticisms are basic analysis. « You are growing rapidly and you cut [rates]. That isn’t normal, » said Alpay Dinckoc, equities analyst at Oyak Securities, an Istanbul-based brokerage. The central bank last cut interest rates in August, after a second quarter in which growth was 8.8%.

« This is a ridiculous debate but there is a rising pressure. . . . In all topics people are censoring themselves, » said one Istanbul economist, who declined to be named. « When I criticize the central bank it might be published in Sabah [a large pro-government newspaper] and then I can’t get an appointment in Ankara and can’t do my job effectively. »

Many central banks around the world have lower interest rates than Turkey — including 0.5% at the U.S. Federal Reserve — as they try to stave off recession. However, Turkey is expected to grow by 7%-8% this year. It is rare for governments to target zero real interest rates as a matter of policy.

On Wednesday, Mr. Babacan said he believed there would be « no problem » financing the current-account deficit, which would begin to fall as energy prices fall. He also said the government had « not forgotten » inflation.

« My prime minister’s will for a zero real interest rate is an ideal target. That is an ideal target which we would really like to see at one point, but that point might not be so close, » Mr. Babacan said in London on Wednesday.

For now, at least, Mr. Erdogan’s zero interest-rate target appears to have become a notional one. In late October, the central bank significantly tightened monetary policy by giving itself the option to raise its overnight lending rate to 12.5% and halt repo auctions. The central bank has used both tools, effectively making its higher profile 5.75% repo rate irrelevant.