TODAY’S – Lira falls as ErdoIan turns the heat on central bank

Lira falls as ErdoIan turns the heat on central bankIn a statement on Tuesday which market experts said contradicts conventional economic theory, Prime Minister Recep Tayyip ErdoIan said Turkey’s high interest rates were to blame for high inflation and accused the central bank of “failing to bring inflation down.”ErdoIan said on Tuesday the central bank’s interest rate cut last week was not enough and called for more “serious” decisions from the bank.

And this statement took its toll on the lira, which was one of the world’s worst performing currencies on Tuesday with as much as a 1 percent loss in value against the US dollar The lira weakened to 21060 against the dollar after ErdoIan’s comments, down from 20977.Increasing his tone of criticism, ErdoIan said on Tuesday the government would “do what was necessary when the current central bank administration’s tenure is over” Governor Erdem BaII’s tenure will end in 2016.

The main Istanbul share index fell 134 percent to 77,548 points, outperforming the broader emerging markets index, which was down 051 percent.ErdoIan had been calling for an emergency rate cut for weeks as he strives to maintain economic growth — and thus his popularity — ahead of his expected bid for the presidency in August.

ErdoIan’s frequent criticism of the central bank has already raised concern about political interference and this was his second harsh statement about the bank’s policies in a week. The bank, which had ramped up rates in January partly to defend the currency, cut them for the first time in a year this month despite stubborn inflation.

“Your interest rate policy is wrong,” ErdoIan told the bank over the weekend.Markets are now concerned that the central bank will have to cave in to pressure from ErdoIan and opt for an untimely and immature rate cut.

The bank cut its one-week repo rate by 50 basis points to 95 percent this month. The central bank convenes for their next monetary policy decision on June 24.

Economists say expectations that the European Central Bank will loosen policy and that the US Federal Reserve will not raise rates anytime soon give The Turkish Central Bank room for further cuts. But inflation is still far above estimates.

Turkish Statistics Institute (TurkStat) data show that annualized inflation topped market estimates, rising to 839 percent in March from 789 percent in February. Market observers expect year-end annualized inflation for 2014 to hit an average of 798 percent, well above the central bank’s target of 66 percent.

SOURCE: Today’s Zaman

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