analysis
The Turkish lira falls to a record low after the abrupt change at the top of the central bank. Meanwhile, experts are seriously doubting the official inflation data in Turkey.
Turkey’s battle against high inflation rates is far from over – on the contrary: in January, consumer prices rose by 64.9 percent year-on-year – after 64.8 percent in December. The national statistics office announced this today in Ankara. But can you actually trust the official inflation data? Recently, international observers have increasingly expressed doubts about the reliability of the data.
Erdogan Personnel changes make suspicious
The background is the numerous personnel changes that President Recep Tayyip Erdogan initiated in the Turkstat statistics office, and managers were also replaced.
In addition, the inflation rate measured by Turkstat and the cost of living index of the Istanbul Chamber of Commerce used to correlate very strongly – both indicators have always been at virtually the same level in the past, with slight deviations.
Researchers see inflation rates more than twice as high
In the spring of 2022, however, they suddenly decoupled for no apparent reason; Since then, the Istanbul indicator has notoriously been significantly higher than the official inflation rate. For comparison: In January, the cost of living index was 76.2 percent, more than eleven percentage points above the inflation rate.
According to independent experts from the ENAG research group, this value is probably set far too low. They put inflation in January at 129.1 percent compared to the same month last year.
Why inflation is so high in Turkey
The high inflation in Turkey at the beginning of the year does not come as a surprise; experts had warned against such a development in view of the unexpectedly large increase in the minimum wage. The monthly minimum wage rose to 17,002 lira (516 euros) in January – an increase of 49 percent compared to the level set in July.
Added to this is the weak lira, which has been causing consumer prices to rise for months. After all, a weak domestic currency makes importing goods and raw materials such as oil from abroad more expensive. This in turn causes consumer prices to rise. Economists therefore also speak of “imported inflation” with regard to Turkey.
Turkish lira falls to record low
At the beginning of the week, the Turkish lira fell to a record low against the dollar: at its peak, you have to pay 30.70 lira for one dollar – more than ever before. With the renewed decline in the price of the lira, the foreign exchange market is reacting to the latest developments at the top of the Turkish central bank.
Central bank chief Hafize Gaye Erkan resigned amid allegations of corruption, which she denies. The internationally experienced financial expert was seen by many economists and market observers as a bringer of hope in the fight against high inflation in the country, as the Turkish central bank had made an unprecedented U-turn under her aegis: Since June last year, Erkan raised the key interest rates from 8.5 to 45 percent .
Erkan’s successor made a career at Fed and Amazon
Is Erkan’s resignation now putting the fight against inflation in Turkey at risk? At least Erkan apparently didn’t have to leave like many of her predecessors because their monetary policy suddenly no longer suited President Erdogan.
Her successor Fatih Karahan – like Erkan himself – made a career in the USA, rose to become chief economist at the online giant Amazon and also worked for the Federal Reserve Bank of New York for ten years. Like Erkan, Karahan is considered a representative of a conventional monetary policy. Turkish Finance Minister Mehmet Simsek announced that economic policy would continue without interruption.
Hope for continuity in Turkish monetary policy
“There are therefore good reasons to expect that the Simsek-Karahan team will now continue to deliver what the Simsek-Erkan team delivered,” says foreign exchange expert Tatha Ghose from Commerzbank. According to economists, it is not rocket science what needs to be done to get the high inflation back under control: high key interest rates, which President Erdogan had resisted for so long, will then be unavoidable.
But such a strict monetary policy can only be successful if it also manages to stop the lira’s decline and regain investors’ trust in the Turkish currency. Recent changes in personnel at the top of the central bank – for whatever reasons – are not exactly encouraging.