Inflation in Türkiye is said to be below 40%. However, experts are skeptical of the official figures and some are now pinning high hopes on the new finance minister Simsek – is that right?
According to official sources, high inflation in Turkey eased further in May. According to the Ankara Statistical Office, consumer prices rose by 39.6 percent year-on-year. As a result, inflation was below 40% for the first time in 16 months. Official inflation hit a 24-year high of 85.5% in October and has been falling since then.
Experts doubt official interpretation
However, independent experts have cast doubt on the official inflation figures, as President Recep Tayyip Erdogan has made numerous personnel changes to the statistics office by presidential decree ahead of his re-election in May. For example, Enag, an Istanbul-based inflation research group, is assuming significantly higher inflation in May, at 105% to 109%.
For market watchers, the decline in Turkey’s official inflation rate is not a surprise. They point to the artificial stabilization of the lira in the months leading up to the presidential election.
Weak lira leads to imported inflation
Ulrich Leuchtmann, FX analyst at Commerzbank, warned: “Since this exchange rate policy is not sustainable and only serves to mask potential weakness in the lira ahead of the general election, the decline in inflation is also unsustainable.”
Over the past week, the lira has fallen to record lows against both the dollar and the euro. A weak lira fuels inflation by making Turkish imports more expensive, which is why experts also refer to it as “imported inflation.”
How Erdogan is weakening the lira
But why is the lira so weak? Experts explained that the continuous decline of Turkey’s national currency is mainly related to the absurd loose monetary policy of the domestic central bank, which is actually acting at the behest of Erdogan after the change of high-level personnel.
Contrary to all economic logic, given the high inflation, Turkey’s president has repeatedly urged the central bank to lower interest rates, thus fueling what economists expect – and only further.
The Central Bank of Türkiye has a reputation problem
Incidentally, Erdogan has also damaged the credibility of Turkey’s central bank, further weakening the lira. The market is now convinced that the Turkish central bank is just a puppet of Erdogan.
Back in 2018, Nobel laureate Paul Krugman warned of a “death spiral” for the Turkish economy. At the time, he also made clear that domestic events, such as repeated attacks on the independence of the country’s central bank, could be a trigger.
Simsek wants ‘rational’ monetary policy
Many market watchers are now pinning their hopes on Mohammad Simsek. Erdogan named the veteran economist as finance minister over the weekend. “Turkey has no choice but to return to rational politics,” Simsek was quoted as saying.
This made many experts look at it with admiration, because this statement means that the previous monetary policy was “irrational”. Commerzbank analyst Leuchtmann remains only cautiously optimistic: “Of course, I hope Simsek will be able to convince the president that a real, sustainable shift to rational monetary policy must take place. But Simsek’s appointment in itself is not a reason to predict that. In fact, it remains to be seen how far Erdogan will let go of his new finance minister.
Lira hits record low
Against this backdrop, it’s no surprise that currency markets reacted with extreme skepticism to Simsek’s appointment, with no hint of early praise: the Turkish lira continued to fall at the start of the week, hitting record lows against the greenback. At the top, $21.21 must now be paid for 1 lira. That compares to $4.46 five years ago.
The lira’s recent record lows suggest the market finally wants to see action. They want central banks to act independently and take inflation seriously by continuing to raise interest rates. Based on Erdogan’s experience in recent years, they simply don’t care about guarantees, statements of intent and vague glimmers of hope.