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Turkey pays hefty price for interest rate obsession

Under government pressure to keep interest rates low, Turkey’s Central Bank has failed to act against the free fall of the Turkish lira, leading to a massive burden on the foreign debt stock.
Turkey's Economy Minister Nihat Zeybekci speaks during an interview with Reuters in Ankara August 11, 2014. Turkey's government will maintain its calls for lower interest rates following Prime Minister Tayyip Erdogan's victory in the country's first direct presidential election, the economy minister said on Monday. Zeybekci told Reuters in an interview that the central bank's core mandate for price stability should be expanded to include employment and growth, although he added this would not be a top prior
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Turkey’s government has become so obsessed with interest rates that it has come to resist rate hikes at the expense of much bigger financial troubles. The origins of the government’s theory of an "interest rate lobby" seeking to undermine the economy could be tracked to its Islamist roots and desire to install an interest-free banking system, illustrated by moves to expand the Islamic banking sector via public banks. And while encouraging interest-free banking, President Recep Tayyip Erdogan and the government have exerted both open and covert pressure on the Central Bank to lower interest rates.

In an interview in July, Economy Minister Nihat Zeybekci, a figure close to Erdogan, offered a clear illustration of how the government keeps the Central Bank under pressure. “A one-point rate hike means an additional burden of 5 billion Turkish lira for the country [on its foreign debt stock]. The Central Bank should put its thinking cap on. This is a usury rate. You can’t have production, investment or employment with such a rate,” Zeybekci told the Yeni Safak daily.

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