Erdogan Needs to Leave Turkey’s Central Bank Alone

(The Bloomberg View) -- Turkey is in the midst of a currency crisis largely of its own making. For months, President Recep Tayyip Erdogan has pressed the central bank not to raise interest rates to support the lira. But if Turkey is to arrest an inflationary spiral, the president will need to step aside and let the central bank get on with its job.

The Turkish lira’s decline began with the strengthening of the U.S. dollar, which prompted investors to flee emerging markets worldwide. Turkey has been especially vulnerable, however, because the country imports so much more than it exports. At 6.5 percent of gross domestic product, its current account deficit is one of the widest in the world.

At the same time, price increases have been accelerating. The country’s inflation rate stands at 10.9 percent, well above the central bank target of 5 percent. The government has made things worse by running an expansionary fiscal policy and handing out corporate tax exemptions, and the central bank hasn’t raised interest rates enough to keep the economy from overheating.

President Erdogan, facing an election in June, has not wanted the central bank to intervene, because of his long-held, very unorthodox belief that high interest rates cause rather than curb inflation. Making matters worse, he hinted last week that if he wins next month’s vote, he might curtail the central bank’s independence. Investors took fright, sending the lira and government bonds to new lows.

Turkey’s central bank has since shifted tack: On Wednesday night, it raised one of its benchmark interest rates from 13.5 percent to 16.5 percent. But while the lira initially rebounded, it has since fallen back — a sign that investors remain skeptical that the central bank can stem the crisis.

Erdogan has at least paid lip service to Wednesday’s rate rise, saying Turkey would follow global principles on monetary policy. He also vowed to move against inflation and shrink the current account deficit — though he did not explain how.

But this is not enough. Erdogan should fully endorse the central bank’s new policy course. Even more important, he needs to commit to restoring the bank’s complete independence if he is reelected. Turkey’s central bank can effectively fight inflation only if the president leaves it alone.

©2018 Bloomberg L.P.

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