Erdoğan’s far-right ally points to need for ‘painful’ interest rate hike

Turkish President Recep Tayyip Erdoğan’s influential ruling coalition partner said Tuesday that the government needed to take “painful” economic recovery measures that included interest rate hikes, Agence France-Presse reported.

Far-right Nationalist Movement Party (MHP) leader Devlet Bahçeli’s comments delivered important political cover for Erdoğan’s new economic team to pursue a more conventional approach to cure Turkey’s accumulating woes.

Turkey’s annual inflation rate hovers near 40 percent and its central bank reserves stand at historic lows after two years of Erdoğan’s unorthodox economic policies.

Erdoğan appointed market-friendly economist Mehmet Şimşek as finance minister and former Wall Street executive Hafize Gaye Erkan as the head of Turkey’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 favored by Erdoğan.

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

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

Bahçeli 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 Turkey to achieve economic stability, and it has become inevitable to bear the current burden.”

Litmus test

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

Erdoğan 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 percent late last year.

Turkey’s main interest rate now stands at 8.5 percent — still 31.1 percentage points below the annual rate of inflation.

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

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

His alliance with Erdoğan has enabled the president’s Justice and Development Party (AKP) to control parliament and push through policies without the need for the opposition’s support.

Bahçeli often voices ideas that eventually become part of Erdoğan’s ruling strategy.

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