(James Saft is a Reuters columnist. The opinions expressed are his own)
By James Saft
March 12 (Reuters) - Turkey is an object lesson in the dangers of political interference in monetary policy, made much worse when it is based on the economic equivalent of trying to repeal the law of gravity.
Turkey’s President Tayyip Erdogan, who seems to think high interest rates cause high inflation rather than the other way round, met with Central Bank Governor Erdem Basci on Wednesday in a meeting investors hoped would smooth over differences which have sent Turkey’s lira and asset markets reeling.
A respite rally in the lira ensued, but it still stands about 12 percent down against the dollar since mid-January, since when Erdogan and advisors have stepped up a vocal campaign to pressure the central bank to lower interest rates. Basci has cut rates by 75 basis points over two meetings, not a satisfactory result to the president.
A statement from Erdogan’s office said the meeting participants agreed on the need to maintain “the current environment of stability and confidence” which would, if only such a mood existed, be a very fine thing. Also discussed was Erodgan’s “sensitivity” on the issue of interest rates, the statement said.
“Sensitivity” does not perhaps quite do justice to the bizarre nature of Erdogan’s views on interest rates.
Speaking in early February, Erdogan accused the central banks of misunderstanding the interplay of inflation and interest rates, calling interest rates the “cause” and inflation the “result.”
He’s also criticized the statutory independence of the central bank, posits the existence of an “interest rate lobby” and called defenders of high interest rates “traitors.”
Did I mention there is an election in Turkey coming up in June?
All of this has had the quite predictable result of sending the lira to a series of all-time lows, blunting the otherwise desirable effects of lower global energy prices.
Erdogan was accompanied in the meeting by, among others, Yigit Bulut, his chief economic advisor and a seeming wellspring of the set of ideas about both interest rate orthodoxy and the dark forces in favor of high ones.
Bulut’s views on the workings of physical reality are every bit as idiosyncratic as his understanding of economics: he once suggested Erdogan’s foes were trying to kill him using the power of thought.
Basci’s powers of thought travel far more conventional lines, at least to judge by his public comments and track record. He hiked rates by 550 basis points last year to choke off inflation after yet another bout of currency weakness.
Inflation has fallen, with an assist from oil prices, rising slightly on the most recent reading, to 7.55 percent, and Basci, under pressure, has made cuts.
It is also his, and Turkey‘s, bad luck that the Fed now appears to be preparing to raise interest rates. The Turkish central bank meets next week, as does the U.S. one, at which the Fed may well drop the key word ‘patience’ from its policy statement. This will pressure the lira and is difficult generally for Turkey, which must attract foreign capital to finance itself.
Once that is past, we might expect to see further efforts by Erdogan both to jawbone the central bank and, very possibly, to change its mandate and limit its autonomy.
“What this implies then is the inevitable recurrence (perhaps weeks or months down the road) of detrimental political rhetoric, continuing challenges to the (Turkish central bank) and to traditional economic theory, and the risk of the disappearance of key policy makers in conjunction with the June parliamentary elections timeline,” Phoenix Kalen, strategist at Societe Generale, said in a note to clients.
“The best the market can hope for is a temporary reprieve from political pressure, with the president and leading politicians temporarily silencing their critical attacks. With that said, a relapse appears unavoidable.”
If you tried to make a story up to illustrate the dangers of political control over monetary policy, you probably could not do better, and if you made this one up, you might not be believed.
Sensible people can disagree about the role of a central bank in a democracy and about the appropriate economic management strategy given varying circumstances.
What isn’t in doubt is that elected politicians have a well-known bias towards easy money, preferring its tangible near-term benefits at the polling stations to its very real and often very high medium- and longer-term costs.
Turkey will not rewrite the history of economics but simply provide yet another familiar, if dreary, chapter in the history of politicians. (At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at email@example.com and find more columns at blogs.reuters.com/james-saft) (Editing by James Dalgleish)