Turkey interest rate bet explodes at 80% inflation


President Recep Tayyip Erdogan has seen his currency decimated, falling 44% last year and 26% this year. Photo / Khalil Hamra, AP

While the rest of the world has tightened monetary policy to deal with the global surge in inflation, Turkey’s central bank has stubbornly kept its key rate unchanged since January.

In fact, it actually cut the rate significantly in the last third of 2021, bringing it down from 19% to the 14% it currently stands at.

The central bank has taken this approach under sustained pressure from Turkish President Recep Tayyip Erdogan, who believes that higher interest rates are actually fueling inflation.

Conventional economic wisdom is the reverse. He argues that high interest rates dampen inflation and looser monetary policy inflames it.

A man buys bread in the Ulus district of the capital Ankara, Turkey.  Photo / Burhan Ozbilici, AP, File
A man buys bread in the Ulus district of the capital Ankara, Turkey. Photo / Burhan Ozbilici, AP, File

Speaking in May, the president defended his bet and called those who worried about Turkey’s monetary policy “illiterate”.

“Those who try to impose a link between the reference rate and inflation on us are either illiterate or traitors,” he said.

“Pay no attention to the ramblings of those whose only quality is to see the world from London or New York.

Some of the alleged illiterates who opposed Erdogan’s rate cuts were once central bankers. Not anymore. It has repeatedly dismissed such voices from the body, and it is now led by its fourth governor in four years.

The consequences of Erdogan’s experiment have been brutal.

Turkey's inflation rate, according to official data from the Turkish Statistical Institute.  It has more than quadrupled over the past year.  Chart / Trading Economics
Turkey’s inflation rate, according to official data from the Turkish Statistical Institute. It has more than quadrupled over the past year. Chart / Trading Economics

A year ago, Turkey’s inflation rate was already a worrying 19%. By the end of last month, it had hit a staggering 79%, its highest level in 24 years, and 16 times the central bank’s inflation target of 5%.

Some experts believe the official government estimate is actually a gross underestimate, with the true inflation rate somewhere well into the triple digits.

Professor Steve Hanke of Johns Hopkins University called the official figure “total fiction”, putting the true rate at 128%.

Incidentally, those watching the world from London are currently experiencing an inflation rate of 9.4%. In New York, it is 9.1%.

That’s a lot more inflation than either country would like – hence the US Federal Reserve is set to announce another interest rate hike this week – but it’s preferable to 80%.

As Turkey’s economy continues to grow despite this runaway inflation, its currency has been decimated. The value of the lira fell 44% last year and fell another 26% this year to an all-time high against the US dollar.

Companies are unable to plan for the long term, such is the volatility of the economy. And while the wealthy Turks are doing well, most of the population is struggling.

A man gets his hair cut in Istanbul, Turkey.  The UN now estimates that 1.6 billion people in 94 countries are in food, energy and financial crisis.  Photo / Francisco Seco, AP, File
A man gets his hair cut in Istanbul, Turkey. The UN now estimates that 1.6 billion people in 94 countries are in food, energy and financial crisis. Photo / Francisco Seco, AP, File

A recent poll showed that more than a third of Turks were unable to meet their basic needs, and another 44% barely managed.

“The poor are suffering the most from inflation, but middle-class Turks are also suffering,” The Economist noted in a column on the situation last week.

“As their purchasing power declines and their job security erodes, many are moving out of the middle class and feeling both angst and anger.”

Last May, when the inflation rate was *only* 70%, leading economists were already calling Erdogan’s experiment a “total failure”.

“It’s about rising food and energy prices, but also about the dramatic failure of monetary policy in Turkey,” said Timothy Ash of Bluebay Asset Management, for example.

“This is the abject and utter failure of Erdogan’s unorthodox monetary policy.”

The president remains impassive. He blamed his country’s rapidly rising inflation on foreign interference.

According to data released yesterday by the Bureau of Statistics, Australia’s consumer price index (CPI) rose 1.8% in the June quarter, with the annual inflation rate rising to 6.1%.

In New Zealand, it was announced on July 18 that inflation had reached 7.3%, the highest since 1990.

Stats NZ chief executive Jason Attewell said the increase was largely due to rising rents and building costs. Prices for new home construction rose 18% in the June quarter of 2022, compared to the same period last year.

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