* Economy Minister says high interest rates contributing to
* Says criticism not an effort to pressure central bank
* Echoes PM Erdogan who strongly opposes high borrowing
* Finance Minister defends central bank fight vs inflation
(Adds market reaction, Simsek comments)
By Seda Sezer and Ebru Tuncay
ISTANBUL, May 28 Turkish interest rates are too
high, contributing to inflation and undermining growth and
employment, Economy Minister Nihat Zeybekci said on Wednesday,
adding to recent government criticism of the central bank.
The political noise over interest rates has undermined
confidence in the central bank and added to pressure on the
lira, which slipped to 2.1083 against the dollar by
0925 GMT from 2.0979 late on Tuesday.
"We think interest rates are high, higher than the levels
they should be at," Zeybekci told reporters at an industry
conference in Istanbul.
"Markets are pushing market interest rates down ... The
central bank should lead the market trend, not follow the market
from behind," Zeybekci said, arguing that high borrowing costs
were contributing to rising inflation.
Prime Minister Tayyip Erdogan said two days ago that the
central bank's surprise interest rate cut last week, which
followed a huge rate hike in late January, did not go far
Speaking separately on Wednesday, Finance Minister Mehmet
Simsek defended central bank efforts to tame rising prices but
also said inflation was likely to peak this month, reinforcing
expectations that the bank could again lower rates.
The comments from Erdogan and others have added to concerns
about government interference in monetary policy.
But Zeybekci denied that the government was trying to
"I don't think we are putting pressure on the central bank
by expressing our worries here," he said.
Last week the central bank cut interest rates for the first
time in more than a year, unwinding some of January's huge rate
hike aimed at halting a dramatic slide in the lira amid an
emerging market sell-off.
Erdogan and Zeybekci's view that high interest rates lead to
inflation are contrary to the opinion of most economists, who
argue that Turkey's stubborn inflation is largely imported,
driven by a weak lira and a heavy trade deficit.
"Zeybekci does himself no favours with investors by again
backing his prime minister by arguing that high interest rates
contribute to inflation," said Timothy Ash, head of emerging
markets research at Standard Bank in London.
"The AK Party government have something of a bee in their
bonnets about this ... Most economists, and central bankers,
would argue that the causality is the other way around, but it
does show the dominant thinking within the AKP."
SIMSEK DEFENDS CENTRAL BANK
Erdogan, who has dominated politics for more than a decade
and overseen a period of unprecedented growth, is keen to
maintain his record on the economy ahead of an expected run in
the country's first direct presidential election in August.
"The question ... is whether commentary from Erdogan and
some of his ministers is just meant for domestic consumption ...
and driven by the electoral calendar, or the sub plot is to
actually pressurise the central bank to cut rates," Ash said.
Speaking in Istanbul, the finance minister appeared to
defend the central bank by stressing that its credibility was
vital to Turkey and that it should be backed in its efforts to
tame rising prices.
"I believe that the central bank must be strong in its fight
against inflation, and we need to support it," Simsek said.
But he also forecast inflation would top out this month,
boosting expectations that the central bank might loosen policy
again at its rate-setting meeting in June, which could leave
Turkey vulnerable in the eyes of some investors.
"We have always viewed appropriately high interest rates
(c.10 percent) as the necessary and sufficient condition for
Turkey's CAD (current account deficit) to remain reliably
financed through coming years of progressively less easy
monetary policy," Commerzbank said in a note to clients.
"This defence worked, as expected, recently when the central
bank hiked rates in an emergency meeting. But, this defence
could be about to be dismantled," said the bank, which
recommended investors cut their exposure to Turkey in the coming
Turkey's 10-year benchmark bond yield rose
to 9.35 percent from 9.23 percent at Tuesday's close. The
Istanbul share index rose 1.2 percent, outperforming
the broad emerging markets index.
(Additional reporting by Dasha Afanasieva; Writing by Nick
Tattersall; Editing by Hugh Lawson)