Turkey’s gross domestic product (GDP) is estimated to have grown by a staggering 18% in the second quarter of the year, driven by a strong base effect from last year’s downturn but also a vibrant consumer demand after the removal of pandemic restrictions. He rarely speaks of fighting inflation, while highlighting the economic revival that has followed the turmoil caused by the COVID-19 pandemic. Today, Erdogan continues to opt for a high growth rate, despite the hefty economic price it could exact, in a bid to offset the popular frustration with soaring inflation. Most notably, the abundant flow of foreign capital to Turkey began to decrease, inflation picked up and the economy’s growth rate declined, making it harder to please voters. As a result, it was able to easily preserve and even increase its popular support to win consecutive elections. The AKP, which came to power in November 2002, enjoyed both domestic and external economic tailwinds until 2013, which helped it keep inflation low and sustain economic growth. Yet his wiggle room could be shrunk further by fresh dollarization, as evidenced by the immediate rush for dollars in reaction to his remarks.įor Erdogan’s Justice and Development Party (AKP), the “right” economic policy is the one that does not erode its voter support. Tackling inflation requires economic cooling and belt-tightening, but Erdogan is clearly averse to such measures and feels compelled to gamble on growth in an inflationary environment. WATCH: A Uniquely Turkish Disease: High Chronic Inflation Erdogan’s comments about an upcoming rate cut despite the gloomy inflation trend has fueled concern that he is playing down inflation and would force the central bank to lower rates. The downtick is expected to continue in the coming days, raising the specter of a fresh dollarization wave.Ĭontrary to Erdogan’s assertions, the rise in consumer prices is expected to continue in August under the impact of shortfalls in food supply amid drought and wildfires plaguing the agricultural sector and a huge gap with producer inflation, which stands at 45% year-on-year. 6 - it had been 8.56 - and has stayed in that region since (it was around 8.65 to the dollar Aug. Following his remarks, the Turkish lira, which was already under pressure from global trends, weakened as low as 8.64 to the dollar Aug. President Recep Tayyip Erdogan’s assertions that interest rates would be decreased and stop Turkey’s nearly 19% inflation from rising further have sparked fresh jitters in financial markets as the Turkish leader appears bent on spurring economic growth at the expense of costly side effects.Įrdogan’s remarks last week came as a signal that he intends to pressure the central bank to lower rates, sticking to his unconventional view that high interest rates cause high inflation. Mustafa Sonmez explains the hazards of pre-mature rate cuts.
Renown economist and currently al Monitor columnist Mr. The polls mentioned above suggest the markets may give him an opportunity by November or so. However, President Erdogan’s intentions are clear: Cut rates as soon as possible to stimulate the economy. According to BloombergHT and AA Finance polls economists don’t anticipate a rate cut in Thursday’s (today) Central Bank of Turkey (CBRT) MPC meeting.