Turkey’s finance minister said on Saturday the government has no plans to limit capital flows to stop the slide of the lira, pledging market-friendly policies regardless of recent currency woes.
“In recent days, there has been unwarranted speculations about possible changes in Turkey’s macroeconomic policies... Let me make it clear again... Turkey is an open economy. We’ll maintain market-friendly, prudent, and sound macroeconomic policies,” Turkish Finance Minister Mehmet Simsek said on Twitter. “There’ll be no restrictions on capital movements and we’ve no plans to impose additional taxes on FX [foreign-currency] deposits or other financial instruments.”
The lira has lost about a third of its value in six months because of the US Federal Reserve’s moves to curtail its easy-money stimulus program, which has led investors to pull money out of emerging economies — including Turkey, which to make matters worse has also been hit by instability brought on by a massive corruption scandal.
Turkey’s central bank doubled its key interest rate to 10 percent on Tuesday, momentarily halting the lira’s fall, but a further Fed stimulus cut hit the currency again later in the week.
The central bank decision also irked Prime Minister Recep Tayyip Erdogan, who said it risked putting the brakes on economic growth.
Erdogan said he was ready to jump in with a “plan B” or “plan C” if needed to boost the lira — raising market concerns he might move to restrict capital flows.
Simsek sought to downplay those fears.
“Central bank’s credibility and its independence is vital to the future of the Turkish economy. My government is committed to maintain this,” he said.
The government has left its economic growth forecast untouched at 4 percent for this year, despite mounting warnings from analysts that it will fall short of that target. Growth prospects for this year do not even come close. After recent currency sell-off and the increase in interest rates, the economy may expand 1.9 percent this year, according to JPMorgan Chase & Co, which revised its estimate down from 2.5 percent on Wednesday.
For the government, the stakes of interest rate hikes are high. Basci’s supporters and his critics agree on one thing — the policy shift risks further slowing growth in Turkey’s economy, Erdogan’s trump card in successive election wins, in a year when the ruling party must contest two key ballots.
“The political costs of rate hikes are increasing exponentially,” Abbas Ameli-Renani, emerging-markets strategist at Royal Bank of Scotland Group PLC in London, said in an interview.
Unless investors force his hand, Basci is unlikely to raise the main policy rates again soon, he said.
Additional reporting by Bloomberg