In Turkey, Erdogan signals a shift to conventional economics
Turkey’s central bank sharply hiked interest rates on Thursday, the clearest sign yet that President Recep Tayyip Erdogan is shifting his country to more orthodox economic policies in hopes of taming a painful cost-of-living crisis.
The spike in rates, from 8.5 percent to 15 percent, came less than a month after Erdogan, Turkey’s dominant politician for two decades, won a third presidential term despite a challenge from a new united opposition, high inflation that caused many Turks feel poorer and catastrophic earthquakes in February that killed more than 50,000 people.
Members of the Turkish opposition feared that Erdogan would capitalize on his victory to crack down on his opponents and further consolidate power. But to date, he has taken no drastic action and has largely maintained his previous positions, including using Turkey’s NATO membership to dissuade Sweden from joining the alliance.
His biggest shift has been in economic policy, an apparent attempt to stave off the threat of interlocking economic problems that economists say have been largely caused by Mr Erdogan.
The official annual inflation rate rose above 80 percent last year and stood at 39.5 percent last month, eroding the purchasing power of Turkish households and sending the national currency, the lira, to an all-time low. Outside groups have accused the government of manipulating the statistics, saying that real inflation is twice as high.
Ahead of last month’s election, Erdogan called on the central bank’s foreign exchange reserves to prevent the lira from falling further while freeing up billions of dollars in new spending to shield voters from the immediate effects of high inflation . He raised the minimum wage, increased civil servant salaries and changed regulations to allow millions of Turks to take early public retirement.
Mr Erdogan also pushed for interest rates to be cut repeatedly, from 19 percent in 2021 to 8.5 percent this year, in defiance of orthodox economic theory and practice, which calls for interest rate hikes to control inflation.
Since his victory on May 28, Erdogan has not immediately announced a change of course, but has taken several steps that point to a more conventional economic policy aimed at curbing inflation and reducing the threat of a currency crisis, but which the economy is also in recession.
He reappointed Mehmet Simsek, a highly regarded former Merrill Lynch banker and minister in Erdogan’s government, as finance minister. To head the central bank, he appointed Hafize Gaye Erkan, a Princeton-educated economist and former director of the now-defunct First Republic Bank. Ms. Erkan is the first woman in Turkey to hold the position.
Announcing the rate hike, the bank said further increases would follow “in a timely and gradual manner until a significant improvement in the inflation outlook is achieved”.
Given the new appointments, many analysts had expected an even stronger rate hike, and the lira’s value continued to fall after the new rate was announced.
Mr. Erdogan has long promoted the unorthodox idea that lower rates lead to lower inflation, a theory that didn’t work but did ensure continued economic growth.
It remains unclear whether Erdogan will continue to allow interest rates to rise as the Turkish economy begins to slow.