Erdogan vows to tame Turkish inflation as scepticism grows

Güldem Atabay

3 years ago

President Tayyip Erdogan promised on Wednesday to tame Turkey’s surging inflation, which hit 36% last month, but economists predicted it could push much higher, piling further pressure on the battered lira currency.

The lira shed 44% of its value in 2021, its worst performance in Erdogan’s near two decades in power.

It stood at 13.31 against the dollar at 1705 GMT, up from Tuesday’s close of 13.8. Earlier on Wednesday it had rallied as far as 4.7% to 13.15, its strongest level in more than a week, though it was not immediately clear why it had firmed so much.

Thanks in part to costly state interventions in the currency market and to government measures that helped calm a full-blown crisis last month, the lira had largely held in a 13.7-13.94 range since last Thursday.

Speaking in parliament, Erdogan said Turkey was protecting its economy against what he called attacks and had taken under control “foreign financial tools that can disrupt the financial system”.

“The swelling inflation is not in line with the realities of our country,” Erdogan said, adding that the government’s measures would soon soften the burden of “unjust” price hikes.

Under pressure from Erdogan, who seeks higher growth by boosting production and exports, the central bank has slashed its policy rate by 500 basis points to 14% since September. It holds its next rate-setting meeting on Jan 20.

Goldman Sachs said in a research note it expected annual inflation to exceed 40% in January, after which it could surpass 50% and remain elevated until the end of the year, when base effects would lower it to around 33%.

“The deeply negative real rates and the high level of loan growth are likely to keep inflation elevated and continue to put pressure on the lira,” the Wall Street bank said.

ECONOMIC GROWTH

Despite the recent market volatility, Turkey’s economy is estimated to have grown by a hefty 9.5% in 2021, the World Bank said in its latest Global Economic Prospects report, as it rebounded from the coronavirus pandemic and related lockdowns.

But the bank also forecast that growth would slow to 2.0% this year and 3.0% in 2023. In its previous report last June, it had seen growth of 5.0% in 2021 and 4.5% in both 2022 and 2023.

Turkey’s $720-billion economy grew 0.9% in 2019 and 1.8% in 2020, weighed down by a recession triggered by a separate currency crisis and later by the pandemic.

After the lira slumped to a record low of 18.4 against the dollar in late December, Erdogan announced a scheme to encourage savers to convert foreign exchange deposits, compensating depositors for any losses due to lira weakness.

On Tuesday Turkey added corporate accounts to the scheme, which the Treasury says has attracted some 108 billion lira ($7.8 billion) of deposits.

Goldman Sachs said it expected Turkish authorities to attempt “more administrative and regulatory measures” to curb inflation before making an eventual monetary policy U-turn.

But Carlos de Sousa, EM debt portfolio manager at Vontobel Asset Management, said he did not see rate hikes any time soon.

“This time is different. Erdogan has finally got tired (of having high interest rates),” he said.

Reuters