Erdogan says rate hike was bitter but necessary for Turkey

ANKARA/ISTANBUL (Reuters) - Turkey’s President Tayyip Erdogan said on Friday the central bank’s big rate hike a day earlier was bitter but necessary, and his newly-installed finance ministry pledged complementary policies that would help get inflation under control.

FILE PHOTO: Turkish President Tayyip Erdogan speaks during a ceremony to mark the modern Turkey's founder Ataturk's death anniversary, in Ankara, Turkey November 10, 2020. Presidential Press Office/Handout via REUTERS

The strong show of confidence from the government came after the central bank on Thursday hiked its key interest rate by 475 points to 15% and pledged to remain tough on double-digit inflation, meeting lofty expectations and boosting the lira.

The monetary tightening was the first move under new bank governor Naci Agbal, who like Finance Minister Lutfi Elvan was appointed less than two weeks ago under a surprise leadership overhaul.

Erdogan made the appointments and pledged last week a new economic approach after two bad economic contractions in as many years and a halving of the currency’s value since early 2018.

“We are aware that we need to take some bitter pills if needed at this stage. I evaluate yesterday’s interest rate hike decision in this framework,” Erdogan said in a speech to business leaders.

Inflation has been stuck near 12% all year. Erdogan said the main goal is to ease price rises which should in turn stabilise the currency, though he also repeated his unorthodox economic view that interest rates are the cause of inflation.

“Our real target is to first lower inflation to single digits as soon as possible, then to target levels ... and to ensure that interest rates come down in line with this,” the president said.

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Erdogan’s repeated calls for lower rates and his dismissal of two central bank chiefs since mid-2019 have raised concerns about political interference in monetary policy.

The rate hike was the sharpest in more than two years and could support the lira after it hit a series of record lows in recent months, though it could also slow an economic recovery from coronavirus fallout.

The lira TRYTOM=D3 on Friday gave back half its gains from a day earlier and weakened more than 1% to as much as 7.6360 against the greenback.

In a written statement, Elvan - who replaced Erdogan’s son-in-law Berat Albayrak after his surprise resignation on Instagram - backed what he called a “strong and clear” move by the central bank.

The government will form fiscal policies that complement monetary policy and support macroeconomic and price stability, he added.

The economy’s recovery could slow as the pandemic worsens and new restrictions are adopted. The consumer confidence index slipped to 80.1 points in November suggesting caution after a brief improvement, official data showed.

Additional reporting by Ece Toksabay and Ezgi Erkoyun; Editing by Jonathan Spicer and Toby Chopra