Erdogan Gets a Windfall From Central Bank Rates That He Assailed

(Bloomberg) -- Turkish President Recep Tayyip Erdogan rarely missed an opportunity last year to demand lower interest rates from a more cautious central bank. He won’t be as upset about the windfall those rates brought.

The regulator doubled its profit to 18.4 billion liras ($4.6 billion) last year, a time when the cost of money it provided to banks was at its highest in at least six years. In comparison, the nation’s three largest commercial lenders trading on the stock exchange posted a combined 17.9 billion liras in net income.

The windfall is of interest to only one of more than 6,000 central bank shareholders -- the Treasury, which is entitled to nearly all of the profit as dividends and taxes.

The regulator’s income has been among the one-off items that boosted the budget in the last few years, revenue that’s been crucial for authorities as they spent their way out of a slowdown triggered by 2016’s attempted coup. Its profits could rise further in 2019, with lending costs likely to remain elevated, according to Inanc Sozer, managing director of Istanbul-based Turkey Macro View Consulting.

“The central bank makes most of its profit from financing other banks at no cost to itself,” Sozer said. “Elevated levels of central bank profits are usually subject to criticism” because they point to a failure to meet policy targets, he said.

The healthy profits do coincide with a less than stellar record in delivering on the bank’s primary responsibility -- ensuring price stability. Inflation is hovering above 10 percent, or twice Turkey’s official target, and is seen by analysts as only slowing to 9.9 percent by the end of the year. The bank says price gains will slow to 7.9 percent but has warned that policy could be tightened further if the outlook deteriorates.

©2018 Bloomberg L.P.