Turkey’s Erdogan blames interest rates as core inflation hits 13-year high



By Daren Butler and Behiye Selin Taner

ISTANBUL, Oct 3 (Reuters) – Turkey’s core inflation spiked to a 13-year high last month, data showed on Tuesday, prompting President Tayyip Erdogan to blame interest rates for fuelling price growth, reiterating an unorthodox stance that has unnerved investors.

Inflation remains one of the Turkish economy’s most pressing problems. While the central bank has said it will stick to tight monetary policy, Erdogan – who has described himself as an “enemy” of interest rates – has called for lower rates to boost credit growth and spending.

“We still have not been able lower inflation and this is due to interest rates,” Erdogan said in a speech to deputies from his ruling AK Party in Ankara, after the data was released.

“The fall in interest rates is unfortunately not at the level we would like. If we can’t achieve this, many troubles await us. We must solve this,” he said.

Erdogan’s belief that inflation is caused by interest rates is at odds with orthodox economics, which views rates as an important tool to keep prices in check.

Erodogan’s comments have prompted concern that the central bank is less than independent and faces political pressure from Erdogan. The bank last month left its highest policy rate, known as the late liquidity window, unchanged for the third straight meeting.

The rise in inflation comes as Turkey’s domestic economy has recovered from the downturn that followed last year’s failed coup, helped by a raft of government stimulus measures. The economy expanded at a break-neck pace of 5.1 percent in the second quarter.

“The continued deterioration on the inflation front, especially core indicators, shows that monetary policy is not tight enough to contain the inflationary effects from strengthened domestic demand,” said Gokce Celik, chief economist at QNB Finansbank, in a note to clients.

The central bank was likely to forgo “meaningful additional tightening” unless the lira currency came under swift pressure, Celik added.

The lira was at 3.5865 to the U.S. dollar at 1025 GMT, weaker than Monday’s close of 3.5694.

The data showed that headline inflation rose 11.20 percent, its third-highest level this year. On a monthly basis, the headline figure rose 0.65 percent, less than 0.76 percent forecast in a Reuters poll.

While food prices declined, education and transport costs surged.

“Today’s data mean that headline inflation will be slower to fall back than we had expected,” said Liam Carson of Capital Economics in a note.

“While we still expect the central bank to loosen monetary policy over the next year or so, this is likely to begin later than we had previously anticipated.”

Producer prices rose 0.24 percent month-on-month for a year-on-year rise of 16.28 percent, the data showed.

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