Portugal Colonial - Erdogan ally points to 'painful' Turkish rate hike

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 Turkey's accumulating woes.

The central bank will hold its first policy meeting Thursday since Erdogan unexpectedly filled his government with market-friendly officials after winning a hard-fought relection last month.

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

Erdogan named respected economist Mehmet Simsek as finance minister and former Wall Street executive Hafize Gaye Erkan as the head of Turkey's central bank in a reshuffle that filled foreign investors with hope last month.

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

The Turkish leader said last week that 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.

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

- Litmus test -

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

Erdogan sped through a series of central bank chiefs 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.

Bahceli 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 Erdogan has enabled the president's Islamic-rooted AKP 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 Turkey's course.

This year's slowdown in Turkey's inflation could be threatened by huge government spending on campaign pledges that Erdogan showered on his supporters before the vote.

One of these involved raising the minimum wage for the second time this year.

The new monthly net minimum salary of 11,402 liras ($485 dollars) announced Tuesday is more than double the wage set at the end of last year.

R.Veloso--PC