February 4, 2015 / 2:35 PM / 5 years ago

UPDATE 2-Turkey's Erdogan bemoans central bank independence; sends lira to record low

(Updates with lira’s record low)

By Humeyra Pamuk and Nevzat Devranoglu

ISTANBUL, Feb 4 (Reuters) - Turkish President Tayyip Erdogan made fresh criticism of the central bank’s policies on Wednesday, stoking worries over the bank’s independence and sending the lira to a record low against the dollar.

The lira dropped to 2.4485 against the dollar from 2.4210 earlier, extending losses following Erdogan’s comments about the monetary policy committee’s performance which were perceived as a potential threat to the bank’s independence. It was trading at 2.4440 at 1607 GMT.

“It is called an independent board, but this is where we end up ... We have to be at a better place, we have to succeed in this,” Erdogan said in a speech in which he reiterated his view that inflation would fall when rates were cut.

“Interest rates are what shape inflation. If you keep the rates high, the inflation will be high too but if you cut it, inflation will also fall. There are still people who don’t understand this,” he said.

Bankers said Erdogan’s comments over independence would fuel investor worries and the lira could see further volatility.

“Erdogan and his government are becoming increasingly detached from the economic reality,” said Lars Christensen, head of emerging markets at Danske Bank.

“Obviously this continued talk is putting pressure on (Central Bank Governor Erdem) Basci and the Turkish central bank ... With this continued gradual centralisation of power and increasingly disregarding economic realities you are going to add more volatility.”

Erdogan, a long-time advocate of loose monetary policy, has repeatedly criticised the central bank for not cutting rates more sharply and quickly, and is looking to boost economic growth ahead of a parliamentary election in June.

The central bank has already cut its main rate by 50 basis points last month and had said that if January inflation fell more than 1 percentage point, it could hold an interim policy meeting to assess a further rate reduction.

Tuesday’s inflation data showed a smaller than expected fall, however, forcing it to shelve that plan. Shortly after the data release, the bank said it would hold its monetary policy committee meeting on Feb. 24, as scheduled.

Lira weakness also weighed on equities. Istanbul’s main share index fell 1.83 percent to close at 85,910.14 points while Turkey’s 10-year benchmark bond rose to 7.38 percent from 7.16 percent at Tuesday’s close.

Additional reporting by Karin Strohecker in London; Editing by Catherine Evans

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