Turkish president Recep Tayyip Erdogan has abandoned his life-long hostility to interest rate rises, vowing to use “tight monetary policy” to cool rampant price growth as his government acknowledged inflation would reach 65 per cent by the end of this year.
The remarks from Erdogan, who had previously lashed out at the “interest rate lobby” and referred to higher borrowing costs as “the mother and father of all evil”, are a sign he is backing the more orthodox monetary policy of his new economic team.
“With the help of tight monetary policy, we will bring inflation back down to single digits,” said Erdogan at an address on Wednesday to dozens of government officials at his sprawling Ankara palace. “We will maintain fiscal discipline, which we see as the foundation of confidence and stability in our economy.”
Finance minister Mehmet Simsek and central bank chief Hafize Gaye Erkan have sought to cool Turkey’s $900bn economy since their appointment in June following Erdogan’s re-election.
Erkan’s central bank has already raised interest rates from 8.5 per cent to 25 per cent. A 7.5 percentage point increase last month was viewed by investors as a strong commitment to addressing powerful price pressures and a yawning current account deficit.
Even during the election campaign in May, the president had insisted on keeping rates low in the face of price pressures — a policy widely blamed for igniting a prolonged and painful inflation crisis. As part of its medium-term economic programme published on Wednesday, the Turkish government said inflation would hit 65 per cent by the end of 2023, compared with 59 per cent in August. The forecast is higher than the 58 per cent the central bank expected in late July.
In the 78-page economic programme unveiled on Wednesday, the government said “monetary, fiscal and tax policies will be co-ordinated by prioritising price stability”.
That marks a break with the pre-election era, when a stream of rules were introduced to keep the economy on an even keel without raising interest rates.
That strategy meant the country burnt through billions of dollars’ worth of foreign currency reserves in an unsuccessful attempt to prop up the lira, with the government having to resort to regulations to stop businesses and consumers from buying dollars and euros. Erdoğan’s government also raised public sector pay and gave away free gas in the run-up to the vote.
The Turkish government pledged on Wednesday to maintain a “floating exchange rate regime” and said they would take “measures” to dent demand, and inflation, such as higher interest rates.
Inflation is set to fall to 33 per cent by the end of next year and reach single digits by the end of 2026. The government also expects growth to slow this year, with gross domestic product expanding 4.4 per cent compared with 5.5 per cent in 2022.
Erdogan also gave the strongest signal yet that policymakers were planning to unwind a vehicle in which the government compensates depositors on $128bn-worth of savings when the lira depreciates, saying the government would “pave the way” for the “conversion” of these deposits.
The so-called foreign currency protected deposit scheme tightly links the country’s public finances to the performance of the currency.
The lira barely changed following the announcement. However, Hakan Kara, a former central bank chief economist, said the medium-term economic plan “presents the right messages”.
“Focusing on price stability, the efficient distribution of resources, and sustainability is valuable,” Kara said. “It looks realistic.”