June 20, 2019 / 2:07 PM / 5 months ago

UPDATE 2-Erdogan pledges return to low interest rates in Turkey

(Adds lira, trader comment, FX context)

By Jonathan Spicer

ISTANBUL, June 20 (Reuters) - Turkish President Tayyip Erdogan said on Thursday he remains opposed to the country’s tight monetary policy and pledged a “definitive solution” to soon lower the central bank’s key interest rate from 24%.

Turkey’s central bank raised its policy rate to some of the highest levels found in emerging markets last year after a currency crisis sent inflation soaring above 25%. It has since slowed to 18.71%, but rates have been left unchanged, with the economy in recession and the lira still weak.

Erdogan, who criticised last year’s policy tightening even though it won praise from investors for stemming the crisis, noted that the U.S. Federal Reserve and other major central banks have recently shifted to a more dovish stance. The Fed’s key rate is set at 2.25% to 2.5%.

“In my country, unfortunately, the interest rate is 24%. This cannot happen. That’s why soon we will bring a definitive solution,” Erdogan told reporters in Istanbul. “Turkey has to return from this interest rate policy in a very careful way.”

He said he opposes high rates because they stoke inflation - a view that contradicts economic theory - and because they are curbing investment and employment.

In part due to worries over the central bank’s independence from political pressure, the Turkish lira lost some 30% of its value last year and has shed another 9% this year.

The currency slipped briefly on Thursday after Erdogan made the comments.

“Erdogan’s call for lower interest rates caused a sell off in lira, though his more positive comments about U.S. relations limited the selling,” said a foreign exchange trader.

Turkey, the largest economy in the Middle East, has taken several steps to defend its lira. On Sunday, Nationalist Movement Party (MHP) leader Devlet Bahceli - a key Erdogan ally - said Turkey needs a “new and just” foreign exchange regime.

Asked on Thursday whether work is being done on this, Erdogan spoke only generally and said: “There could be a time when a fixed FX regime could be appropriate, or there could be a time when floating FX regime could be right,” adding the floating regime would continue in Turkey.

Reporting by Jonathan Spicer, Ebru Tuncay and Birsen Altayli; Editing by Humeyra Pamuk

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