Econostrum | Economic News in the Mediterranean

Recep Tayyip Erdogan to continue lowering interest rates despite soaring inflation

Written by Frédéric Dubessy on Tuesday, June 7th 2022 à 10:40 | Read 365 times

Inflation beats record after record in Turkey since one year (photo: F.Dubessy)
Inflation beats record after record in Turkey since one year (photo: F.Dubessy)
TURKEY. On Monday 6 June 2022, after a meeting with his cabinet, Recep Tayyip Erdogan reaffirmed his intention to pursue his low interest rate strategy. Despite an inflation that reached 73.5% of GDP in May 2022, and keeps breaking records. "No one should expect that from us. This government will not raise interest rates. On the contrary, we will continue to lower them," insisted the Turkish president.

At the end of 2021, he asked his Central Bank (TCMB) to lower its key rate from 19% to 14%, with the immediate result that the Turkish lira fell. The national currency is now at its lowest level since December 2021 and trades at one pound for $16.6. It has lost 47.79% in one year. At the same time, inflation is at its highest level since 1998, although the increase is more moderate than from April 2022 to May 2022 when it rose from 61.14% to 69.97%

This policy goes against the grain of what is done in other countries, i.e. raising interest rates to curb consumption and thus bring down prices, thereby curbing inflation. It is also being fought within Turkey itself, with several economic ministers and presidents of the Turkish Central Bank having been killed over the past three years for their opposition to low interest rates

Stating "we don't have an inflation problem, but a high cost of living problem" (sic), the Turkish president attributes part of the current state of his country's economy "to the fact that some citizens insist on keeping their savings in foreign currency." According to him, "the other part is due to imported inputs because of increased production."

Inflation really at 160.76% according to Turkish economists

Inflation continues to rise in Turkey (chart: TÜIK)
Inflation continues to rise in Turkey (chart: TÜIK)
However, at the end of December 2021, Recep Tayyip Erdogan decided to deviate, in an indirect way, from his sacrosanct credo by issuing new debt securities with a guarantee cancelling the differential between the exchange rate and the interest rate. In effect, therefore, the rent for the pound increased. The short-term effect was immediate, with the currency rising by 10% against the dollar in one day. But the remedy did not last, as the figures show today.

In its Friday 3 June 2022 issue, Tüik, the Turkish Statistics Office, notes a 2.98% rise in inflation in May 2022 compared to the previous month, 35.64% compared to December 2021 and 73.50% compared to May 2021. On a rolling 12-month basis, it stands at 39.33%.

Each of its publications is accompanied by a questioning by members of the opposition to Recep Tayyip Erdogan - who will put his mandate on the line in June 2023 -, but also by economists. In particular those grouped within Enag (Inflation Research Group). On Friday 3 June 2022, they stated that inflation was really 160.76% over one year, i.e. double the official rate communicated by Tüik. 

+107.62% on transport fares

According to the Office, the highest price increases in May 2022 and over one year were observed in transport (+107.62%), food and non-alcoholic beverages (91.63%), furniture and household equipment (82.08%). Education (27.48%), clothing and footwear (29.80%) and health (37.74%) recorded the most moderate increases.

The Turkish President wants to stimulate production, exports and employment thanks to the low rates. In his last speech, he promised once again a current account surplus and thus a stabilisation of the currency which will allow inflation to fall. In February 2022, Nureddin Nebati, the Turkish Minister of Economy, announced that inflation would peak in April 2022, but that it would remain "below 50%. We are a long way from these forecasts. And again, how can we not mention another statement, that of Recep Tayyip Erdogan in January 2022, assuring the "return to single digit inflation as soon as possible."

"If there were no clashes in the region, Turks would have been able to feel the concrete benefits of our economic programme," he assures today.

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