site.btaIs Turkey Giving Up Fight with Galloping Inflation?

News about rampant inflation in Turkey in recent months has become so trite that the media no longer even report that the latest inflation rates have broken yet another record. The rates are undoubtedly high. Official figures released by the Turkish Statistical Institute (TURKSTAT) on August 3 showed July inflation of nearly 80% year-on-year, while unofficial reports put the figure at over 100%. July 2022 inflation in Turkey's largest city, Istanbul, reached 99%.

The authorities say that, just as anywhere in the world, the main reasons for rising prices and the fall of the Turkish lira are the appreciation of energy resources and particularly the crisis in Ukraine. In recent months, the government promised to cushion the effects of the steady rise in prices by introducing some measures, including a reduction of VAT on a number of products and raising wages. The measures, though, have failed to work, for the lives of ordinary Turks get increasingly difficult, many people are gripped by despair, and tangible social instability is looming. While the Turkish lira lost 44% of its value in 2021 and another 20% this year, the central bank keeps the base rate unchanged, thus continuing to stick to what a number of experts call its "ultra-soft monetary policy".

Rising consumer prices forced Turkish economists to change their inflation projections several times this year as efforts to stabilize the Turkish lira failed amid the economic fallout from the Ukraine crisis. At the end of July, the central bank raised its end-year consumer price growth projection to 60.4%.            

Unfortunately, even in a world hit by the worst inflation in decades, Turkey "stands out", falling behind only a few countries like Zimbabwe, Venezuela and Lebanon where price hikes exceed triple digits, Bloomberg said.

Reducing inflation in Turkey has proved very difficult as the central bank has not raised the base rate above 14%, bowing to heavy pressure from President Recep Tayyip Erdogan, who argues that higher interest rates spur on inflation.

Ever since he was granted broad powers within the presidential system in 2018, Erdogan has been trying to dictate Turkey's economic policy. In three years, he fired several Central Bank governors and nearly all members of the Monetary Policy Committee.

"Unreasonable expectations and a weakening [Turkish] lira push fuel prices further up. We do not expect the central bank to increase interest rates in response to rising inflation. Instead, the political leadership is calling for even lower interest rates," says economist Selva Bahar Baziki.

Last week, Central Bank Governor Sahap Kavcioglu expressed confidence that the so-called new economic model, which prioritizes production, exports and employment, will help stabilize prices and the local currency. However, the results of this monetary policy are affecting the forex market with the lira weakening dramatically against the dollar. Then again, President Erdogan wants high economic growth ahead of the presidential and parliamentary elections in June 2023, even though rising consumer prices are eroding incomes and increasingly threatening his political standing.

Meanwhile, in June, businessmen of the Turkish Industry and Business Association (TUSIAD) urged Erdogan to listen to experts in order to curb inflation. TUSIAD’s new President, Orhan Turan, asked the Government to change the current economic model and opt for more classical lines to tackle rampant inflation. 

In turn, businessman and billionaire Tuncay Ozilhan, who chairs the Board of Anadolu Group and is President of Anadolu Efes, said that inflation was getting "out of control" and the priority now should be to bring it down. As inflation has reached unprecedented levels, it will increase income inequality further, he pointed out.

Erdogan, though, recently reiterated that Turkey would rather reduce the interest rate than raise it, after which the Turkish lira dived. Again. "Turkey has rejected the methods of imperialist financial institutions that make the rich even richer and the poor poorer by raising interest rates," said Erdogan.

Against the backdrop of the failed efforts of the authorities, a number of Western experts and opposition supporters comment that the Government is clearly helpless and looks as if it has virtually given up fighting galloping inflation. Economic analysts expect the situation to get even worse. “In the end they will have to hike,” said Timothy Ash of BlueBay Asset Management. “Otherwise, you end up in a situation where inflation is so high you will see locals selling the lira, you end up in a vicious cycle of inflation and depreciation.”

Die Welt’s financial editor Holger Zschaepitz, in turn, tweeted that Turkey had returned to the inflation of the 1990s and Erdogan seems to have lost the last economic confidence he inspired.