For years, Turkish President Erdogan stuck to his controversial interest rate policy – despite the economic crisis and extreme inflation. Experts are now expecting a drastic increase in key interest rates.
The industrial park TAYSAD is located about an hour from the center of Istanbul. Founded in 2003, literally out of the sand. Now there is almost everything there: 90 industrial companies, kindergartens, schools, a connection to the motorway and even a fire brigade. Work is done in three shifts, and around one percent of Turkish exports are processed from there.
“Everything is messed up”
Alper Kanca’s father, who studied in Austria and speaks fluent German, set up this center for industrial suppliers – and then passed it on to his son. Kanca was then President of the Turkish Association of Automotive Suppliers (TAYSAD) for a long time, and now he has handed over the business to his successor. But he is still on the board.
Kanca worries about the Turkish economy. “Everything is messed up right now. It’s a tragedy,” he says ARD-Interview. Above all, the sharp rise in wages and inflation are a burden on his group of companies. He indirectly blames politics for this. The past six months have been a “difficult phase”, there was an election campaign and a lot of money had been spent on election gifts. Kanca is now putting hope in the new government’s policies.
New beacon of hope
Hopes rest on two people in particular. They are supposed to rehabilitate the Turkish economy. There is for one the internationally experienced financial expert Hafize Gaye Erkan, the new head of the Turkish central bank at the age of just 44. So far, your professional career has only gone in one direction: upwards. She was one of the first women to make it to the top floor of First Republic Bank in the United States, and later to the top ranks of the investment bankers at Goldman Sachs.
And then there is Mehmet Simsek, a finance professional. He is the strong man, finance minister in the new government of Turkish President Erdogan. Simsek returns to the front row after five years. Until the summer of 2018, he was first economics minister, then finance minister, and finally deputy prime minister. One who sometimes contradicts President Erdogan. Erdogan has now brought Simsek back and announces “quick action”.
His new Finance Minister Simsek is now talking about strict budgetary discipline and the goal of a single-digit inflation rate. Does that mean that he wants to say goodbye to his unorthodox interest rate policy? Kanca, the boss of the economy, is in good spirits. “It has to be done now. And we have confidence in Mr. Simsek. He’s not a prodigy, but if he plays by the rules, at least we’ll have clarity, even if it hurts,” he said on behalf of 80 Turkish companies.
away from the low interest rate policy?
Western central banks, the US Federal Reserve and the European Central Bank fight inflation with higher interest rates. In Turkey, inflation is at the highest level. Officially, it is around 39.6 percent in May compared to the same month last year. Experts suspect it to be many times higher. Many people can hardly afford everyday life with the constantly rising prices. This is one of the reasons why the Turkish government raised the minimum wage by 34 percent at the beginning of the week, to 11,400 Turkish lira, around 460 euros. Around 40 percent of the population currently lives on the minimum wage.
Even Erdogan’s coalition partner Devlet Bahceli, the chairman of the right-wing MHP, spoke out in advance for higher interest rates, even if it was “painful”. Apparently, the financial policy in Turkey is to be readjusted.
contradictory Signals from Erdogan
Ahead of the central bank meeting, President Erdogan said he was determined to push inflation into the single digits. However, he will stick to his policy of “low inflation and low interest rates”. He informed the new head of the central bank about this. “God willing, neither our finance minister nor our central bank governor will embarrass us,” Erdogan said. “I think hopefully we will get positive results.”
So there could be conflicts between economic politicians and the government if the current measures do not work. Then Erdogan could blame others again. Because in the spring of 2024 there are important local elections. Erdogan definitely wants to win that, and for that he needs an economic upswing.
Interest rate policy triggered currency crisis
The current interest rate policy has triggered a currency crisis. The national currency, the lira, lost 44 percent in value in 2021 and another 30 percent in 2022. In the past three months, this downward trend has accelerated again, with the currency falling by 25 percent.
This exacerbates the economic crisis because the country, which is poor in raw materials, purchases many goods from abroad and has to pay for them in foreign currency. The authorities have therefore tapped into the central bank’s reserves to stabilize the currency. In addition, some Arab countries supported the lira, but only until the runoff.
Banks hardly give credit anymore
Back in the business park of automotive suppliers: Here they are satisfied with the expected interest rate hike. But says that this can only be a first step. As long as inflation is high, interest rates must also continue to rise. Because: The banks currently give hardly any more loans at the market interest rate.
“The interest rates on loans were very low, but there were no loans. And if they can’t take out loans, they can’t live,” says Alper Kanca. He hopes for a new economic policy. And that Erdogan let his finance minister and the new head of the central bank do their job in peace.