Transcript: Turkey’s President on Monetary Policy, Politics

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Click the image above to watch the translated interview in full.

Turkish President Recep Tayyip Erdogan spoke to Bloomberg TV’s Guy Johnson in a televised interview at Bloomberg’s London Headquarters. He spoke on a visit to the U.K. during which he’s also meeting Prime Minister Theresa May and Queen Elizabeth II, as well as executives, bankers and investors. Erdogan said he plans to assume a greater role in setting monetary policy as he gears up for landmark June 24 elections that will finalize Turkey’s transition to a full presidential system.

Below is a transcript of the interview, with the president’s remarks translated from Turkish:

GJ: There are so many questions about what’s happening with the Turkish lira. Let me put a a simple one to you first. Are you comfortable with the current level of the Turkish lira against the U.S. dollar? Are you happy with where we are now?

Pres.: When it comes to the subject of the Turkish lira, of course the purpose here is not just the status of the Turkish lira, but to protect the values of the currencies of the countries we trade with on the international arena. Therefore, we want to trade with domestic and national currencies and we do this currently with Russia, Korea, China, Iran and this continues in a successful manner. This is how we are able to remove the currency pressure and protect our own currency. There are steps we will be taking in order to do this with other countries too and we have seen its benefit at the first stage and we are seeing it.

GJ: Mr. President, over the weekend you have indicated that you’re looking to lower interest rates after the election. So my question is, why not do that now before the election? And is that giving the green light to the central bank to raise interest rates when it meets next month on the 7th? I’m curious as to the timing.

Pres.: Above all else, of course, my function in the executive as the head of the republic is not the same as a prime minister’s. In the new term, from the moment we move to a presidential governing system, our effectiveness there will be very different. Therefore, I will take the responsibility as the indisputable head of the executive with respect to the steps to be taken and decisions on these issues. We’re going to do this so we can be held accountable for the responsibility we’ve taken. Up until this moment, this was not the case. However, after now the situation will be like that. Of course, our concern is this: when we came to power 16 years ago, we took very important steps on the issue of diversifying resources. When I took over the office, our interest rate was 63 percent and while we are taking this down to single figure levels, the inflation rate, which was 30 percent, also went down to single digits. When it came to single digit levels, suddenly explosions of investments started in my country. Together with these explosions of investments, the per capita national income went up to $11,000, from $3,500. At the moment we don’t find this sufficient. The target is to be able to raise this up to $25,000. For this to happen, investments should increase. When investment increases, employment will increase, production will increase and together with this, our international competitiveness will increase. This is our only goal.

GJ: I’m very curious Mr. President about your thoughts on interest rates. You have spoken in the past about this idea of real interest rates and the fact that maybe where inflation is should match where interest rates are. I’m curious about whether or not you feel the Islamic faith should review its position on interest rates to reflect the fact that maybe what should be the new orthodoxy should be that there should be a real interest rate of zero, i.e. the interest rate charged by the central bank matches the inflation rate in the country, we end up with zero at the end. I want to hear your thoughts about whether or not when you talk about a change in the interest rates framework for Turkey after the elections that this is what you’re talking about.

Pres.: Now, if you look, especially after your explanation, I would like to make this matter open and clear to you. Let me give examples from some countries. For example in recent times, we have seen a very serious development in Argentina. In Argentina, the central bank’s nominal interest rate is 40 percent, current inflation is 25.6 percent, but if you look at the real interest rate, it is 14.4 percent. We look at Russia, the central bank’s nominal interest rate is 7.3 percent, inflation 2.4 percent, real interest rate 4.9 percent. We look at Brazil. The central bank’s nominal interest rate 6.5 percent. inflation 2.8 percent, real interest 3.7 percent. Alongside this we look at South Africa, in South Africa a 6.5 percent central bank nominal interest rate, 3.8 percent inflation, 2.7 percent real interest rate. Now I come to my own country. 13.5 percent nominal interest rate, 10.9 percent inflation, 2.6 percent real interest rate. Alongside this, the U.S. has 1.75 percent but on the other hand, inflation 2.5 percent, real interest rate is negative 0.75 percent. Of course we are in the UK. In the UK the nominal interest rate is 0.5 percent, inflation 2.5 percent and the real interest rate is negative 2 percent. That means it appears that when the interest rate gets lower, you can see where the real interest rate falls to. Of course, here there will be employment, investment, production and the United Kingdom’s investors will have much higher international competitive power. To put it very clearly, this is our target at the moment. In other words, the examples are there in front of us. There is no need to look left, to look right and to rediscover the world. When there are such open, clear examples, why do we get flung left or right? We need to take our steps accordingly. And our finance sector must balance itself according to this.

GJ: Do you think that real interest rates should be zero? Are those your thoughts that there should be no difference between the consumer price inflation and the interest rates? Do you think that would be good for Turkey or you think that it needs to be almost a negative real rate. It’s interesting that you draw that spectrum between those different countries. Do you think and I’d be curious as to know what you think that number should be zero.

Pres.: It would be wrong to assess the matter as a matter of zero. Let us look at the matter from here. First of all when you look at the cause and effect relationship, the interest rate is the cause and inflation is the result. The lower the interest rate is, the lower inflation will be. First of all we need to adjust this well. What is the target in the interest rate? It is the real interest rate. OK, what is the real interest rate? The real interest rate is the difference between the interest rate and inflation. The moment you catch this, what do you do with the real interest rate anyway? You take it down in a substantial sense. The moment we take it down to a low level, what will happen to the cost inputs? That too will go down. Well! As soon as the cost input goes down, you either domestically or in the international markets, you will be able to get the opportunity to sell your products at much lower prices and obtain competitiveness. The matter is as simple as this.

GJ: When the decision is made on interest rates, are you consulted? How does the process work? Do they take your opinion, the central bank, when they are making a decision on interest rates?

Pres.: At the moment of course either that way or this way, you are the head of the executive in the country. Of course our central bank is independent. But the central bank can’t take this independence and set aside the signals given by the president, who’s the head of the executive. It will make its evaluations according to this, take its steps according to this. And I believe this will result in very beneficial steps in the future.

GJ: We saw data on the Turkish current-account earlier and it was a little wider than anticipated. I’m curious as to where you see the countries that are going to fund the current-account deficit will come from. You have in the last few years made close friends in Russia and in Iran. Yet those are the kind of countries, given their external balances, that are unlikely to support Turkey’s current-account deficit. Who are you looking at to fund that deficit, to generate the flows that are going to come in. It’s unlikely to be Russia and it’s unlikely to be Iran.

Pres.: Now, first of all we need to discuss this very sincerely. Of course the number one reason for our current deficit is the fact that we are a country dependent on petroleum, natural gas. In other words petrol and natural gas incites, encourages our current-account deficit. Of course, however much we can lower the natural gas, petrol, our current-account deficit will be lowered by that much. However, alongside this, of course Turkey is becoming much stronger by the day in industrial production and the defense industry. When we get stronger here, we will come to a state where we will cover our current-account deficit through industry. This is the unseen face of Turkey at the moment. The developments in this respect are going quite well.

GJ: One of the areas in defense that you could be potentially getting…

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