As re-elected Turkish President Recep Tayyip Erdogan forms his new economic team this month, all eyes are set on Türkiye’s interest rates, a main indicator of whether the country will pivot back to its conventional economic policies.
The appointment of former U.S.-based bank executive Hafize Gaye Erkan as the governor of the Turkish Central Bank, and Mehmet Simsek, an internationally-known former banker as the country’s treasury and finance minister raised hope that the country might move away from its unorthodox strategy that features low-interest rates when inflation is running high.
“The appointment of Erkan … can be taken as a sign that the extremely low borrowing costs, which cause inflation to rise, will normalize in terms of monetary policy,” Enver Erkan, chief economist at Istanbul’s Dinamik Investment Securities, told Xinhua.
Meanwhile, Simsek, who was at the helm of the Turkish economy until 2018, said at a handover ceremony with his predecessor Nureddin Nebati on June 4 that “Türkiye has no choice but to return to a rational basis … We will prioritize macro-financial stability.”
All eyes are now on the next meeting of the Monetary Policy Committee (MPC) of the Central Bank set for June 22, when the new governor is expected to hike interest rates.
“The message received and the expectations formed so far point to a strong signal of policy transition, and the June 22 MPC meeting is in a critical position for its implementation,” the analyst stressed.
In Erkan’s view, the policy rate, currently at 8.5 percent, could be gradually raised to 30 percent.
Following the presidential election last month, the embattled Turkish lira reached a succession of record lows against the U.S. dollar, falling to 23.61 against the greenback on Monday, a new all-time low.
Since the start of this year, the lira has depreciated by over 20 percent.
In a series of tweets last week, Simsek asked the public to be patient, adding that his “immediate priority is to strengthen our team and design a credible program.”
Economists think that while Türkiye may be returning to orthodox economic policies, there is also a need for reforms to strengthen this transition.
A report published on June 8 by the Ankara-based Economy Policy Research Foundation of Türkiye, called on the new economy management team to adopt transparency regarding inflation figures, whose reliability has been questioned by some economists.
The report also urged the new economy team to announce an “action plan” to tackle the most pressing issues such as the widening current account deficit, high inflation, and the record-low foreign currency reserves of the Central Bank.
Some experts believe however that the new economy team doesn’t have a magic wand to secure immediate economic turnaround, and that Turks should prepare to swallow the bitter pill in the form of new taxes and belt-tightening measures.
“The drop in inflation data is only an illusion,” Mahfi Egilmez, an economist and former advisor to the treasury, said on his blog on June 9, pointing out that prices are continuing to increase for most goods.
“To reduce inflation, it is necessary to limit consumption by raising interest rates and endure a decline in growth and a rise in unemployment,” he warned.
