Europe News

Turkey’s PM ‘on warpath' as Fitch warns of volatility

Turkey's Prime Minister insisted his country's economy was on a "good trend" and called for a rate cut to boost investment on Friday, despite ratings agency Fitch slashing its growth forecasts for the country.

On Friday, Prime Minister Tayyip Erdogan - whose AK Party landed a clear win in local elections last weekend - called on the country's central bank (CBRT) to lower interest rates in an effort to encourage investors.

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"Yields are falling. In line with this, the central bank will probably convene an extraordinary monetary policy committee meeting," Erdogan said at a news conference, Reuters reported.

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"Just like it convened extraordinarily last time to hike rates, this time it should convene and lower interest rates."

At the end of January, Turkey's central bank caved in to pressure from the market, raising its overnight lending rate to 12 percent and overnight borrowing rate to 8 percent. The hikes – which were much sharper than expected – were in an effort to stump up the country's embattled currency, which had taken a battering against the dollar since the start of the year.

"You could see this coming a mile off. Politically speaking, Turkey's high interest rates are the least sustainable among the major EMs (emerging markets)", Nicholas Spiro, managing director of Spiro Sovereign Strategy, told CNBC via email.

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"Erdogan appears to be on the warpath after his election victory and he's about to make matters even more difficult for Turkey's central bank."

But despite this pressure, Timothy Ash, head of emerging market research at Standard Bank, said he did not expect the central bank cave in.

"It would be very unwise to move quickly to cut," he told CNBC in an emailed comment. "The concern (instead) is that this could end up in a battle for the control of the CBRT."

'Wide range' of growth forecasts

Erdogan's bullish comments about his country's economy came as Fitch cut its growth expectations for the country, as rebalancing takes its toll.

Tayyip Erdogan
Kayhan Ozer | Anadolu Agency | Getty Images

The ratings agency revised down its growth forecasts from 3.2 percent to 2.5 percent for this year, and from 3.8 percent to 3.2 percent for 2015.

Fitch affirmed the country's rating at BBB minus and said its outlook was stable, but warned that the economy remains "highly volatile."

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The growth forecasts contrast starkly with the government's own gross domestic product (GDP) target. On Thursday, CBRT Governor Erdem Basci insisted that although the economy was slowing, it was on track to expand at close to 4 percent.

Standard Bank's Ash said it was a "relief" that Fitch did not downgrade the country's rating.

"There is a lot of uncertainty over the outlook for growth, and I guess a wide range of forecasts - last year growth proved very resilient despite forex volatility and political uncertainty/instability," he said in a note.

Social media ban

Turkey has been in the global media spotlight over recent weeks, after moves by the government to ban social media websites in the run up to last weekend's local elections.

In March, access to micro-blogging site Twitter and video sharing site YouTube was blocked, sparking outrage both in Turkey and abroad.

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A constitutional court in Turkey lifted the Twitter ban on Thursday, but Erdogan said he "did not respect" the ruling, according to Reuters. He argued the court should have rejected the application to allow users back onto the site, the news wire reported.

The blocking of social media sites came amid a corruption scandal in Turkey, which saw angry citizens take to websites like Twitter amid allegations of government wrongdoing, which Erdogan denied.