ISTANBUL BLOG: Brass-necked Erdogan doesn’t bat an eyelid during screeching U-turn on rates

ISTANBUL BLOG: Brass-necked Erdogan doesn’t bat an eyelid during screeching U-turn on rates
*ENAG is an Istanbul-based inflation research group of economists. / bne IntelliNews
By bne IntelIiNews September 6, 2023

So how’s that for a brass neck? Turkish President Recep Tayyip Erdogan, who for years hasn’t batted an eyelid while informing the world amid Turkey’s rampant inflation that it is actually high interest rates that push up prices (and not low rates as is the conventional wisdom), on September 6 said “tight monetary policy” would be needed to pull back inflation. And the eyelids? Not a flicker.

Perhaps the despot felt like putting his hands to his ears amid the loud screech of his U-turn or proffering an apology for previous errant views. But if so, there were no reports to that effect.

Turkey’s new economic team, appointed by Sultan Erdogan after his late-May re-election that occurred despite warnings the Turkish economy was heading towards a systemic crisis, have gone some way to getting real in communication with the markets. Not all of the way, but some of the way. They now concede that official inflation will likely be as high as 65% by the end of this year (there are plenty of independent economists saying that in reality, which Turkey’s official statistics agency is known to not deal in, it will be a good deal higher than that), compared to August’s 59%. They expect 33% by the end of next year.

Erdogan’s infamous for pursuing a growth-at-all-costs economic approach that results in boom and bust, with far more bust than boom in recent years. While studiously ignoring critics along the way as an autocrat who’s not big on accountability, he’s hit out at the “interest rate lobby” and talked of higher borrowing costs as “the mother and father of all evil”, a sop to his Islamist rooted ruling party AKP.

Even during the election campaign leading up to his May poll victory, he was loudly declaiming that interest rates should be kept low despite persistent price pressures and claims that he was plunging the country into an abhorrent cost-of-living crisis.

The levers favoured by the new economic team, led by ex-Wall Street bankers who will need to tread carefully if they intend to entirely steer Erdogan away from “Erdoganomics” (perhaps likely to be filed under “bonkers-nomics” in future economic textbooks), are by now apparently squeezing growth. The government said on September 6 it sees official growth of only 4.4% this year and 5% next year versus last year’s 5.5%.

Finance minister Mehmet Simsek and central bank governor Hafize Gaye Erkan clearly need to cool Turkey’s $900bn economy, which has threatened to go entirely off the rails. Erdogan may have seen sense, or at least a big slice of it in any event. However, he has important local elections to fight next March. If Simsek and Erkan plan to visit excruciating pain on ordinary Turks as they seek to right the economy, they may have to hold off on the heavy stuff until those polls are over and done with.

In the meantime, Erkan’s central bank has managed to hike the benchmark interest rate from 8.5% to 25%. The markets like it, but they are hungry for more, much more.

Erdogan, for now, may be onboard. Will he stay onboard?

“We will lower inflation to single digits with the support of monetary tightening and improve the current account balance,” he said on September 6 as the government gave its revised economic target for the next three years. But how much do his words really mean at any given time?

“People shouldn’t be under the misconception that the president is moving toward a serious change in interest rate policies,” he said on June 14. “I’m the same.”

"The risk is ever-present that ... Erdogan could lose patience," Commerzbank analyst Tatha Ghose was reported as saying by Reuters. Inflation will "be very high for an extended period of time, which will trigger second-round effects such as wage settlements."