Policy battle: Turkish central bank governor Erdem Basci (left) had been criticised by President Recep Tayyip Erdogan (right) for not cutting interest rates more aggressively
Policy battle: Turkish central bank governor Erdem Basci (left) had been criticised by President Recep Tayyip Erdogan (right) for not cutting interest rates more aggressively

President Recep Tayyip Erdogan of Turkey has backed off in his battle with the country’s central bank after weeks in which the Turkish lira has fallen more than 10 per cent against the dollar.

As national authorities across the world seek to respond to the rise in the US currency, Mr Erdogan held what appeared to be a reconciliatory meeting with Erdem Basci, central bank governor, whom he last month called a traitor for not cutting interest rates more aggressively.

At the meeting at the presidential palace on Wednesday evening, Mr Basci gave the president a 130-page presentation on “restoring confidence to the economy and limiting public debt”, according to the state-controlled Anadolu Agency.

In turn, Mr Erdogan’s office issued a statement that said the “president’s sensitivity about interest [rates] and production were emphasised”, but added that “the present environment of confidence and stability should be meticulously preserved”.

The meeting signalled a shift in the debate between the president and bank, which had seen the lira slide to a succession of all-time lows as Mr Erdogan launched a series of bitter attacks on the central bank.

The currency, which had already been buoyed the previous day by a big fall in Turkey’s current account deficit, had recovered to TL2.59 versus the dollar as of Thursday morning, compared with almost TL2.65 last Friday.

A further test will come on Tuesday, when the central bank is due to decide on interest rates, a day ahead of a US Federal Reserve meeting that will be keenly watched for signs of a possible US interest rate rise this year. Increasing expectations of the Fed’s first rate rise in nearly a decade have played a big role in the dollar’s recent surge against other currencies.

Before last week’s sharp decline in the lira Mr Erdogan had vigorously campaigned for lower interest rates — arguing that they were necessary to restore growth and investment to the levels to which Turkey is accustomed.

The issue is highly politically sensitive, since the country faces June 7 general elections which Mr Erdogan hopes will deliver a strong enough majority for the ruling AK party to deliver constitutional changes that will boost his powers as president.

While rapid growth underpinned much of Mr Erdogan’s spectacular record of electoral success over more than a decade, growth fell to roughly 2.5-3 per cent in 2014, with trade and industrial production figures indicating a further slowdown this year.

But Mr Erdogan’s critics argue that a rapid decline in the lira may provide limited relief for the Turkish economy, not least because of the impact of inflation and big increases in corporate and bank-held foreign exchange debt. In addition they point out that his theory that interest rates cause inflation, rather than vice versa, flies in the face of established economic thinking.

The debate over the central bank has also highlighted differences between Mr Erdogan and Ahmet Davutoglu, Turkey’s prime minister.

Mr Davutoglu held his own eight-hour meeting with Mr Basci and other top economic officials on Tuesday, after which the government issued a statement highlighting the statutory independence of the central bank — which Mr Erdogan has criticised — and praising its for its success in dealing with the 2009 global crisis and subsequent shocks.

Since taking office last August, Mr Davutoglu has worked closely with Ali Babacan, Turkey’s deputy prime minister for the economy, who is himself an ally and childhood friend of Mr Basci.

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