(MENAFN- AFP) The Turkish central bank seemed close to being caught in cross-fire over its independence and interest rates on Wednesday when the finance minister came to its defence despite criticism from the prime minister.
Last week the central bank, which had ramped up rates to fight a currency crisis, shaved one key rate but was criticised for being timid by Prime Minister Recep Tayyip Erdogan.
Turkish Finance Minister Mehmet Simsek came to the bank's defence on Wednesday. "The central bank's credibility is very important for Turkey," Simsek said.
"I believe the central bank did and will do the best," he added. "The central bank's independence is one of the biggest gains of the last decade."
But meanwhile, the economy minister backed the attack by Erdogan who had put pressure on the bank to hold down rates as a crisis developed in the middle of last year.
The bank trimmed its one week repurchase rate, used by commercial banks for short-term funding, from 10.0 percent to 9.5 percent last week in what it said was a "measured decrease".
Fitch rating agency warned on Friday that the rate cut sent a mixed message on monetary policy and that this could damage the bank's credibility.
The cut, the first for a year, was unexpected. But it drew the wrath of Erdogan, who accused the central bank on Tuesday of "kidding the nation".
He told members of his ruling party in the parliament: "Interest rates are high and must be reduced. We are tasked with balancing the (economic) climate."
He said: "The interest rate must be lowered, so that real investments can increase."
Central bank governor Erdem Basci has declined to comment on the premier's criticism.
Economy Minister Nihat Zeybekci said on Wednesday that he would not criticise the central bank but added: "I believe our prime minister is right about his ... complaints".
The lira weakened to 2.1033 against the dollar on Wednesday from 2.096 on Tuesday.
- 'Central bank must be strong' -
The rate cut came after the bank aggressively raised key rates in January in a bid to halt a steep drop in Turkey's currency, the lira, which lost nearly a third of its value in two months.
Erdogan is anxious to hold on to one of his key achievements: the stellar economic growth that Turkey has posted since his Islamic-rooted Justice and Development Party (AKP) came to power in 2002.
Markets value an independent central bank as a bulwark against inflation, which erodes the value of investments in government bonds as well as the value of a currency, while governments often favour low rates believing that this will drive growth and be popular with voters.
Erdogan's ruling party scored a stunning victory in the March 30 local elections, which observers said showed voter satisfaction with the government for its economic achievements.
While growth has slowed from nearly 9.0 percent in 2010 to 4.0 percent last year, the economy does not appear to have been stalled by the tightening of interest rates.
The Turkish premier is tipped to run for presidency, which is currently a largely ceremonial post, in August.
On Wednesday, finance minister Simsek said that Turkey's growth could be sustainable only if the government pressed ahead with structural reforms.
Many economists see increased efficiency and competition as holding down pressures for prices to rise, and that the central bank cannot correct structural inefficiency with low interest rates.
"I believe that the central bank's hand must be strong in the fight against inflation. We must strengthen the central bank's hand," he said.
In April, the central bank revised its year-end inflation target upwards to 7.6 percent from a previous forecast of 6.6 percent.
The central bank said last week that it would maintain tight monetary policy until there was a significant improvement in the inflation outlook.
Standard and Poor's held its credit rating for Turkey on Friday at BB+, but warned of possible tensions ahead on financial markets.
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