Turkey’s central bank again bucked global trends on Thursday, keeping its benchmark interest rate steady despite one of the highest consumer price hikes in the world.
The decision at a monthly political meeting came two weeks after President Recep Tayyip Erdogan – a lifelong opponent of high interest rates – denied that Turkey had an “inflation problem”.
The official annual rate of increase in consumer prices in Turkey has exceeded 70 percent and is on track to break records last set in the late 1990s.
Independent estimates by Turkish economists suggest the actual figure could be much higher.
The inflationary spiral has decimated Turkey’s living standards and helped bring Erdogan’s public approval ratings to one of the lowest levels of his two-decade rule.
But Erdogan has vowed not to raise interest rates ahead of the June 2023 general election.
“We don’t have an inflation problem. We have a cost of living problem,” Erdogan said this month.
The central bank blamed “temporary” global factors for higher prices, keeping interest rates on hold at 14 percent for the sixth straight month.
Economists warn that Ankara’s refusal to join most other countries in raising interest rates to combat the surge in food and energy prices caused by Russia’s invasion of Ukraine could see the Turkish lira collapse.
“High inflation, a fall in the lira and aggressive monetary tightening elsewhere are clearly not enough to convince Turkey’s central bank to hike interest rates,” Capital Economics said in a research note.
“A disorderly decline in the lira is a major risk that would likely be addressed with capital controls rather than rate hikes.”
In the past year alone, the lira has lost half of its value against the dollar.
Those losses have accelerated in recent weeks despite indirect market interventions and other currency support measures that have depleted state reserves to the lowest levels of Erdogan’s rule.
– disbelief –
Economists are struggling to understand how the Erdogan government intends to tackle consumer price hikes ahead of next year’s vote.
Erdogan argues that high interest rates cause inflation – the opposite of the conventional economic belief that more expensive credit lowers prices by slowing spending and dampening demand.
The pious Turkish leader also notes that charging interest goes against Islamic rules against usury and that his policies will turn Turkey into a global manufacturing engine that thrives on cheap exports.
But the devaluation of the lira has made Turkey’s dependence on energy and commodity imports much more expensive.
Turkish economists suspect the government may try to circumvent Erdogan’s ban on interest rate hikes by trying other ways to curb spending.
“They could try to cool the economy by further tightening credit conditions,” said Atilim Murat, associate professor at the University of Economist and Technology.
“But we have seen in the last eight to 10 months that it is not possible to reduce inflation through these measures,” he said.
Foreign economists are even more outspoken.
OANDA trading platform analyst Craig Erlam said Erdogan is conducting a dangerous economic experiment at what is arguably the worst time in decades because of rising global inflation rates.
“It’s like saying I’m going to drink a bottle of vodka because my doctor tells me I have liver disease, but I know better despite having no medical qualifications,” quipped Timothy Ash, an analyst at BlueBay Asset Management, in a note.
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