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Erdogan ally points to ‘painful’ rate hike

ISTANBUL (AFP) – Turkish President Recep Tayyip Erdogan’s influential ruling coalition partner said yesterday the government needed to take “painful” economic recovery measures that included interest rate hikes.

MHP party leader Devlet Bahceli’s comments delivered important political cover for Erdogan’s new economic team to pursue a more conventional approach to cure Turkiye’s accumulating woes.

Turkiye’s annual inflation rate hovers near 40 per cent and its central bank reserves stand at historic lows after two years of Erdogan’s unorthodox economic policies.

Erdogan appointed market-friendly economist Mehmet Simsek as finance minister and former Wall Street executive Hafize Gaye Erkan as the head of Turkiye’s central bank after winning a hard-fought re-election last month.

Both have promoted conventional policies that include interest rate hikes to combat inflation – the opposite of the approach favoured by Erdogan.

The Turkish leader said last week he “accepted” the changes that his new economic team would like to pursue.

But Erdogan added that he still believed that high interest rates contribute to inflation and that his views on economics have not changed.

A street vendor at the Eminonu ferry terminal in Istanbul, Turkiye. PHOTO: AP

Bahceli echoed those remarks.

“The MHP’s view on interest rates is clear, it has not changed. In theory and practice, an increase in interest rates is a political choice that discourages investment, hinders production, and makes the need for credit more expensive,” he told his party members in Parliament.

“However, there are short-term and sometimes painful measures that need to be taken for Turkiye to achieve economic stability, and it has become inevitable to bear the current burden.”

Bahceli’s remarks come two days before the central bank holds one of its most important policy meetings in years.

Erdogan sped through a series of central bankers before finding one willing to push down the policy rate well below that of inflation.

A resulting currency crisis set off a new wave of inflation that saw consumer prices grow at an annual rate of 85 per cent late last year.

Turkiye’s main interest rate now stands at 8.5 per cent – still 31.1 percentage points below the annual rate of inflation.

Analysts see tomorrow’s meeting as a litmus test for how much leeway Erkan has to raise rates.

Bahceli plays an outsized role in Turkish politics despite representing a fringe ultranationalist party that picked up 10 per cent of the vote in last month’s polls.

His alliance with Erdogan has enabled the president’s AKP Parliament to control Parliament and push through policies without the need for the opposition’s support.

Bahceli often voices ideas that eventually become part of Erdogan’s ruling strategy.

The two hold regular private meetings setting out Turkiye’s course.