Inflation in Turkey is said to be below 40 percent. However, experts doubt the official figures, and some are now placing great hopes in the new finance minister, Simsek – rightly so?
According to official information, high inflation in Turkey eased further in May. According to the statistics office in Ankara, consumer prices rose by 39.6 percent year-on-year. The inflation rate was thus below the 40 percent mark for the first time in 16 months. Last October, the official inflation rate reached 85.5 percent, a 24-year record, and has been falling ever since.
Experts have doubts about the official reading
However, independent experts doubt the official inflation data, as President Recep Tayyip Erdogan had already initiated numerous personnel changes in the statistical office by presidential decree before his re-election in May. For example, the Istanbul-based inflation research group Enag assumes a significantly higher May inflation rate of 105 to 109 percent.
For market observers, the decline in the official inflation rate in Turkey comes as no surprise. They point to the artificial lira stabilization in the months leading up to the presidential election.
Imported inflation due to weak lira
“Because this exchange rate policy is not sustainable, but only served to cover up the underlying weakness of the lira in the run-up to the election, the reduction in inflation is not sustainable either,” warns Ulrich Leuchtmann, Commerzbank’s foreign exchange analyst.
In the past week, the exchange rate of the lira against the dollar and the euro has fallen to historic lows. The weak lira makes imports into Turkey more expensive and thus fuels inflation, which is why experts also speak of “imported inflation”.
How Erdogan weakens the lira
But why is the lira so weak? Experts explain the continuing slide of the Turkish national currency primarily with the absurdly loose monetary policy of the domestic central bank, which, after several personnel changes at the top, is de facto acting at Erdogan’s behest.
Contrary to all economic logic, the Turkish president had repeatedly urged the central bank to lower interest rates in view of the high inflation and thus fueled inflation – which economists had expected – only further.
Turkish central bank has one credibility problem
Incidentally, Erdogan also ruined the credibility of the Turkish central bank and thus further weakened the lira. The markets are now convinced that the Turkish central bank is just Erdogan’s puppet.
As early as 2018, Nobel Prize winner Paul Krugman warned of a “death spiral” for the Turkish economy. At the time, he also explicitly named domestic events, such as repeated attacks on the independence of the domestic central bank, as possible triggers.
Simsek wants “rational” monetary policy
Many market observers are now pinning their hopes on Mehmet Simsek. Erdogan appointed the experienced economist as finance minister at the weekend. Simsek is quoted as saying: “Turkey has no choice but to return to rational politics.”
This makes many experts sit up and take notice, as this statement means that the previous monetary policy was “irrational”. Commerzbank analyst Leuchtmann is still only cautiously optimistic: “Of course I hope that Simsek can convince the president that a real, sustainable turn towards rational monetary policy must take place. But Simsek’s appointment alone cannot be reason to predict that.” In fact, it remains to be seen to what extent Erdogan will give his new finance minister a free hand.
Lira at new record low
Against this background, it is hardly surprising that the reaction of the currency markets to Simsek’s appointment was extremely skeptical, and there was no trace of advance praise: the Turkish lira continued to fall at the beginning of the week and marked a new record low against the dollar. At the top, 21.21 lira must now be paid for one dollar. For comparison: five years ago it was 4.46 lira.
The recent record low of the lira shows that the markets finally want to see action. They want a central bank that acts independently and takes the fight against inflation seriously by continuing to raise interest rates. After Erdogan’s experiences in recent years, they don’t give a damn about assurances, declarations of intent and vague glimmers of hope.