Turkey will take steps to lower inflation and will follow free market rules as it acts to raise competitiveness and productivity, Vice President Cevdet Yilmaz said on Thursday after chairing a meeting of a key economic coordination board, reported Reuters.
Since his election victory last month, President Tayyip Erdogan has appointed a new finance minister and central bank governor who are expected to pivot to a more orthodox policy after years of rate cuts that fueled a cost-of-living crisis.
In what were among the first remarks from the government’s economic team setting out its policies, Yilmaz said Ankara would maintain fiscal discipline and would implement a consistent set of policies.
“We will take effective and determined steps in the fight against inflation, which we see as the main problem,” Yilmaz said in closing remarks at the board meeting in the presidential palace.
While this message is consistent with remarks from economy czar Mehmet Simsek, the new Erdogan administration is yet to unveil a concrete program of economic measures to instill confidence among economic agents. While Cevdet Yılmaz, Mehmet Simsek and rookie Central Bank governor Gaye Erkan are capable managers with faith in conventional economic policies to stabilize the economy, Erdogan’s support for such a course change has been lukewarm. As well, he shifted former Central Bank governor and the main architect of financial repression measures, Sahap Kavcioglu to the head of the banking regulator BRSA, which might mean tight monetary policy might be diluted by countervailing macro-prudential steps.
Inflation touched a 24-year high of 85.5% last October and dropped to just below 40% in May. In comments this week, Erdogan said he was determined to lower inflation to single digits under a “low inflation, low interest rate” policy.
“Within the free market rules, we will continue to take steps to increase the competitiveness and efficiency of our economy,” Yilmaz said after Thursday’s meeting.
Erdogan had said in comments released on Wednesday that new Finance Minister Mehmet Simsek will take steps swiftly with the central bank, despite the president maintaining his own unorthodox view that high interest rates cause inflation.
Analysts at leading investment banks now expect Turkey’s central bank to start ramping up rates at its monetary policy committee meeting on June 22.
Erdogan has pursued unorthodox policies for years, aiming to flip the current account deficits to a surplus. But rate cuts carried out despite high inflation sparked a currency crisis in 2021 and the lira has continued to slide since then.
The lira was 0.4% weaker at 23.66 against the dollar on Thursday, near a record low, after weakening more than 20% so far this year. Lates data covering the previous week witnessed very low Central Bank reserves. The promises to embrace orthodoxy have so far yielded modest inflows of financial capital into the stock market, but entry to TL denominated bonds is still not existent.
Yilmaz said the government would work towards achieving its investment, employment, production, and export targets and was determined to remove the current account deficit from being an obstacle to sustainable growth.
The current account deficit widened to $5.4 billion in April and is expected to amount to more than $45 billion this year.
Yilmaz said the government’s medium-term economic plan, which would be shared with the public in September, will reshape public policies and practices. A new year development plan will be announced in October.
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