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0.1 Detail

There has been a history of differences between the Turkish Central Bank (CBT) and Prime Minister Erdogan, a long-standing critic of high interest rates who has argued that they cause inflation. The inflation figures for May, announced on 3 June, led Erdogan to renew his public criticism of the Bank鈥檚 monetary policy.

Annual consumer price inflation (CPI) reached 9.7% in May, up from 9.4% in April. Inflation is above both the official long-term target of 5% and the Bank鈥檚 own 2014 year end forecast of 7.6%. Core inflation, excluding energy and food prices, continues to rise, by 1.4% since April, as many businesses seek to impose price rises to increase profits. Analysts expect the Central Bank to keep its monetary policy tight and resist interest rate reductions for at least the next 1-2 months.

After the release of the inflation figures on 3 June PM Erdogan said 鈥淭he high interest rate is an obstacle to economic growth. The rates are high, but inflation still does not come down. We hope this issue will be resolved as soon as possible鈥�.

Analysts said Erdogan鈥檚 remarks did not help market confidence and raised concerns about Central Bank independence. Both Deputy Prime Minister Babacan and Finance Minister Simsek spoke out during the week in defence of the Bank鈥檚 independence. Babacan said on 3 June that high interest rates might even help growth if they restored investor confidence.

On 4 June the pro-AKP daily Takvim claimed that the UK was trying to create difficulties for Turkey by encouraging flows of 鈥渉ot money鈥� by keeping interest rates high. Takvim said Basci had promised the UK at meetings in London six months ago that he 鈥渨ould never cut interest rates鈥�.

The first quarter 2014 GDP figures, which will be released on 10 June, will be an indicator of performance in the real economy. Current expectations of 3.5 - 4% are higher than previous forecasts, in part because economic recovery in Europe is contributing to a faster increase in Turkish exports.

Comment

One of the cornerstones of the AKP鈥檚 electoral success has been its success in achieving 5% average GDP growth over the last 10 years. From an economic point of view, any cut in interest rates would risk boosting inflation and undermining long-term economic growth.

Evidence from the real economy continues to suggest solid short-term growth. That continues to present opportunities for British business, as well as for inward investment from Turkey to the UK. The 42 British companies in the GREAT Festival of Creativity trade delegation from 20-22 May found a real appetite to do business from Turkish counterparts.

0.2 Disclaimer

The purpose of the FCO Country Update(s) for Business (鈥漷he Report鈥�) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report鈥檚 contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report鈥檚 contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.