Turkey’s Erdogan agrees to monetary policy turnaround under Simsek

Turkish President Recep Tayyip Erdogan appeared to make a major shift on Wednesday about the future of monetary policy in his inflation-plagued country.

Erdogan said he would agree with his new finance minister’s outlook on Turkey’s interest rates, signaling a return to economic orthodoxy after years of the country’s tight grip on the central bank and its refusal to raise rates amid soaring inflation.

The newly appointed finance minister, Mohammad Simsek, who served as deputy prime minister and finance minister from 2009 to 2018, is widely respected by investors.Economists and analysts believe Simsek can turn around Turkey’s cost of living crisis, which has seen turkish lira Over the past five years, the dollar has lost about 80% of its value against the greenback.

“Some of our friends should not be mistaken, like (asking), ‘Is our president planning to make a major change in interest rate policy?'” Erdogan told media on Tuesday, according to a Reuters translation of Turkish media published on Wednesday. . The president was referring to his opposition to rate hikes, which he said has not changed.

“But in terms of what our treasury and our finance minister think,” he added, “we’ve accepted that he’s going to move quickly and get comfortable with the central bank.”

Erdogan has long declared himself a staunch opponent of interest rates, refusing to raise rates even when inflation hits a jaw-dropping 85% in late 2022, insisting any hike would damage the economy. Economists and critics say his policies continue to hurt the lira and drive up inflation, sparking a currency crisis.

this lira The greenback was trading near an all-time low of 23.58 against the greenback at 4 p.m. local time on Wednesday.

Inflation in the country of 85 million people rose 46.62% year-on-year in May, the same month Erdogan was re-elected president and entered his third decade in power. Some economists predict the lira will collapse if Erdogan continues his current path of unorthodox monetary policy, which has sent many foreign investors fleeing over the past few years.

The appointment of Simsek in early June boosted investor confidence.

“It looks like Erdogan has authorized Simsek to raise rates. That’s positive,” Timothy Ash, emerging markets strategist at Bluebay Asset Management, told CNBC on Wednesday. Support Simsek for now.”

Erdogan also named Hafiz Gay Erkan as Turkey’s new central bank governor. Goldman Sachs predicted in a research note that Erkan and Simsek together could lead to severe fiscal and monetary changes that are initially painful.

Goldman Sachs economist Clemens Graff writes that “perfectly orthodox policymakers” would let the exchange rate adjust itself and raise interest rates sharply.

“In our view, this suggests that orthodox policymakers will raise interest rates to 40 percent, the current level of the deposit rate,” he said, adding that the country’s key interest rate could be lowered once inflation stabilizes. Around 25% by the end of this year. Türkiye’s current interest rate is 8.5%.

However, many remain skeptical that Erdogan will actually relinquish control of the central bank’s actions. In just a few months into 2021, Erdogan has fired four senior central bank officials who did not support his economic ideas, and the incoming Erkann will be Turkey’s fifth central banker in just four years. governor.

Orcun Selcuk, an assistant professor of political science at Luther College, does hope that Erdogan will allow economic orthodoxy to take hold — with a particular view on eventual local elections.

“I think Erdogan is willing to calm down before local elections,” Selcuk said. “He really wants to take back Istanbul and Ankara, where the economic crisis and rising cost of living are most evident.”