September 13, 2018 / 9:50 AM / 6 days ago

UPDATE 2-Erdogan says high inflation result of Turkish central bank's wrong steps

(Adds Erdogan quotes)

By Tuvan Gumrukcu and Ece Toksabay

ANKARA, Sept 13 (Reuters) - President Tayyip Erdogan sharply criticised Turkey’s Central Bank on Thursday for taking “wrong steps” over inflation and repeated his opposition to high interest rates, shortly before the bank was due to announce a rates decision.

Investors are expecting a rate rise from the bank but are also concerned that monetary policy is shaped under political influence from Erdogan, who argues that inflation is the result of high interest rates.

“If you say inflation is the cause and interest rates are the result, you don’t know this business,” Erdogan said, adding that he had not once seen the bank correctly forecast inflation.

“We’ve been in this business for 16 years. Will we not learn? You may determine interest rates, but inflation is a result of the wrong steps you (the central bank) have taken,” he said. “And who pays the price? The people,” the president, whose AK Party first won power in 2002, told a traders’ confederation.

The lira, which was largely flat in early morning trade, fell more than 2.5 percent after Erdogan’s comments beyond 6.5 lira to the U.S. dollar, before recovering slightly.

The president, who has described the lira depreciation as an economic war, said the currency was experiencing “fake volatility” and that Turkey’s recent troubles were the result of manipulation.

Erdogan won an election in June which granted him sweeping new presidential powers, fuelling concern that he was taking tighter charge of the economy and of monetary policy.

In his speech on Thursday he said Turkey was “on the side of the free market economy” and would not deviate from that free market framework, while making clear that he was in overall control.

“Difficult times require difficult decision to be taken and implemented,” he said. “All of our institutions, namely our economy management, are working day and night under my coordination as president.”

He also criticised private banks, saying some had increased their interest rates up to 50 percent - more than double the Central Bank’s benchmark rate of 17.75 percent. “How can the private sector invest in such high interest rates?” he asked, adding that such margins were made only by drugs dealers.

Turkey’s central bank is expected to raise interest rates on Thursday to support the lira and rein in inflation which hit its highest in almost 15 years in August.

According to a Reuters poll, the benchmark rate is expected to be increased by between 225 and 725 basis points. Analyst forecasts for the scale of the increase vary widely, as the bank balances concerns over the lira weakness with worries about an economic slowdown. (Writing by Humeyra Pamuk and Dominic Evans; editing by David Stamp)

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