* President says governor, Babacan ‘need to shape up’
* Erdogan seeks boost to flagging growth before election
* Tension sends lira to record lows (Adds quotes, market comment, lira, background)
By Daren Butler and Nevzat Devranoglu
ISTANBUL, March 2 (Reuters) - Defending high interest rates is tantamount to treason, Turkish President Tayyip Erdogan warned at the weekend, and said the governor of the central bank and deputy prime minister in charge of the economy needed to “shape up”.
Deepening a standoff which has rattled investor nerves, Erdogan was quoted on Monday as saying he would hold talks with Central Bank Governor Erdem Basci, under fire for failing to cut rates as sharply as Erdogan wants.
“We will call him and talk,” broadcaster NTV quoted Erdogan as saying on his plane travelling to Saudi Arabia, adding the central banker had himself requested a meeting.
Basci sought to calm nervous investors on Friday by dismissing rumours he would resign, days after Erdogan said the bank’s monetary policy was “unsuited to the realities of the Turkish economy” even after the bank lowered its main rate for the second straight month.
The bank trimmed the one-week repo rate by 25 basis points to 7.5 percent last week but Erdogan wants more aggressive cuts. Economy Minister Nihat Zeybekci, another critic of central bank policy, wants the repo rate cut to 6 percent.
NTV reported Erdogan, who is determined to see stronger growth ahead of a June general election, as saying he had already held face-to-face talks with Basci and economy czar Deputy Prime Minister Ali Babacan.
“They need to shape up a bit,” Erdogan was quoted as saying. “If interest rates don’t fall, Turkey can’t invest.”
The lira hovered near record lows after Erdogan’s latest comments, easing as far as 2.5220 against the dollar from 2.5096 late on Friday, when it touched a record low of 2.5275.
“We think these comments and market tension will continue until the election. I don’t think anything will become clear before then,” said HSBC Turkey’s Treasury Director Fatih Keresteci.
“A process which began with a call for an interest rate cut is being dragged unfortunately towards an unknown channel which will require rates to be hiked more.”
Erdogan believes current rates are impeding economic growth, potentially denting the ruling AK Party’s support in an election crucial to his goal of enacting legislative changes to create an executive presidency.
Growth worries were reinforced by February economic data, with a purchasing managers’ index showing manufacturing activity falling to a seven-month low while exports fell 13 percent.
At a news conference on Saturday, Erdogan said Turkey was facing a “very serious threat from the interest-rate lobby”.
“Anyone who defends this (high rates) is at the beck and call of the interest-rate lobby, this is treason against this nation,” he said.
Last Wednesday, Erdogan questioned whether the central bank was under external influence, in what traders took as a thinly-veiled reference to the network of U.S.-based cleric Fethullah Gulen, a former ally-turned-foe whom Erdogan accuses of plotting against him.
But he told reporters on his plane he did not believe there was such a link to what he calls Gulen’s “parallel structure” within the state apparatus.
“I don’t think our friends at the central bank have links to the parallel structure,” Erdogan said, adding Ankara had looked into possible ties at lower levels in the bank. (Additional reporting by Nevzat Devranoglu; Writing by Daren Butler; Editing by Nick Tattersall and Anna Willard)