Erdogan says Turkish interest rate cut did not go far enough

ISTANBUL Mon May 26, 2014 5:24am EDT

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ISTANBUL May 26 (Reuters) - Turkish Prime Minister Tayyip Erdogan said the central bank's surprise interest rate cut last week did not go far enough to lower borrowing costs which were damaging investment in the country.

Erdogan's frequent criticism of the central bank has raised concern about political interference. He has railed against an "interest rate lobby" of speculators he accuses of conspiring to drive up rates at the expense of Turkey's economic health.

The bank, which had ramped up rates in January partly to defend the currency, cut them for the first time in a year on Thursday despite stubborn inflation. It lowered its one-week repo rate, the main rate at which it currently funds the market, by 50 basis points to 9.5 percent.

Erdogan had been calling for an emergency rate cut for weeks as he strives to maintain economic growth ahead of his expected bid for the presidency in August.

"Are you kidding? When you raise (interest rates) you do it by 5 percentage points at once, when you cut, only half a percentage point," he was quoted by the Sabah newspaper as telling reporters on his plane back from Germany this weekend.

"Inflation has not been trending towards the direction they predicted yet. They constantly revise it. This shows a reality. Your interest rate policy is wrong," he said, repeating his conviction that high interest rates trigger high inflation.

At the end of January, after the lira fell to record lows, the bank raised its overnight lending rate to 12 percent from 7.75 percent, its one-week repo rate to 10 percent from 4.5 percent and its overnight borrowing rate to 8 percent from 3.5.

It expects inflation to begin falling from June but has repeatedly said it will keep policy tight until the inflation outlook improves significantly.

"Look at the interest rates in the United States, Japan. Why are our rates at 15, 16, 17 percent?" Erdogan was quoted as saying, referring to the compound annual rates and commissions charged by some lenders for loans.

"It's a pity, it's a sin. Will there be any investment in a country with such rates," he said.

Central Bank Governor Erdem Basci said last month he saw room for a gradual lowering in rates but ruled out a deep cycle of easing. Policy would stay tight until there was a clear improvement in the inflation outlook, he said. (Reporting by Seda Sezer; Editing by Nick Tattersall and Hugh Lawson)

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