Erdogan announces "tight monetary policy" to tackle alarming inflation

Erdogan announces "tight monetary policy" to tackle alarming inflation
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Turkish President Tayyip Erdogan shifted to a tight monetary policy to tackle high inflation and regain investor trust, despite earlier unconventional approaches, but faces challenges as inflation soars, GDP growth forecasts drop, and the lira weakens

In a significant policy shift, President Recep Tayyip Erdogan announced on Wednesday that Turkey is committed to lowering its alarming inflation rate to "single digits." He expressed confidence that this ambitious goal could be achieved with the support of a "tight monetary policy."

The announcement came as part of a broader effort to address the nation's economic challenges and regain the trust of investors.
For years, Erdogan had publicly opposed high interest rates, advocating for a more unconventional economic approach. However, in June of this year, he appointed a new cabinet and central bank governor in a bid to turn the tide on the country's economic troubles.

Since then, the central bank has aggressively raised its policy interest rate from 8.5% to 25%, signaling a shift towards more orthodox economic policies.
The Turkish government unveiled its new inflation and economic growth forecasts as part of the annual "medium-term program." Erdogan stated that the adoption of a tight monetary policy would lead to a reduction in inflation, emphasizing that Turkey remains committed to economic expansion while making necessary policy adjustments.
The newly presented forecasts project annual inflation to reach a staggering 65% by the end of this year and decrease to 33% in 2024. These figures mark a significant increase compared to the government's forecasts from a year ago when they anticipated 24.9% inflation for 2023 and 13.8% for 2024.
In addition to revising inflation expectations, the government has also adjusted its GDP growth forecasts downward.

The new projections estimate growth at 4.4% for this year and 4% for the following year. While these figures are still relatively optimistic compared to many economists' expectations, they represent a reduction from previous forecasts of 5% and 5.5%, respectively. The current account deficit is predicted to stand at $42.5 billion in 2023 and decrease to $34.7 billion in 2024.
Turkey's economic policy shift began in earnest after President Erdogan's re-election in May. Faced with significant economic challenges, including dwindling foreign exchange reserves, Erdogan initiated a series of measures aimed at stabilizing the economy.

These measures included the appointment of a new cabinet and central bank chief, as well as aggressive interest rate hikes and efforts to liberalize credit and foreign exchange markets.
However, these actions have not come without consequences. The Turkish lira has depreciated by 25% against the U.S. dollar since these policy changes were implemented. Furthermore, annual inflation has surged to nearly 59% in recent months.

As Turkey moves forward with its economic transformation, experts anticipate that the economy may slow down in the coming months. This slowdown is expected to coincide with nationwide municipal elections scheduled for March next year. The fading effects of stimulus measures enacted in the lead-up to the May elections, coupled with the impact of the interest rate hikes, could contribute to this deceleration.
In a recent Reuters poll, analysts predicted a full-year economic growth rate of 2.9%, which is lower than the historical trend for Turkey's emerging market economy. The government's objective is to reverse the years-long trend of foreign investors exiting the market.
With President Erdogan's ruling Justice and Development Party (AK Party) aiming to regain control of major cities like Istanbul and Ankara in the March elections, there is growing concern that higher inflation, rising unemployment, and slower growth could test the president's patience with the ongoing policy shift.
Erdogan has made headlines in the past for his willingness to replace central bank governors who disagreed with his views on interest rates. His insistence on lowering rates amid rising prices in 2021 led to a historic currency crisis and pushed inflation above 85% last year.
Commenting on the situation, Commerzbank analyst Tatha Ghose noted, "The risk is ever-present that...Erdogan could lose patience. Inflation will 'be very high for an extended period of time, which will trigger second-round effects such as wage settlements.'"
The central bank, despite a more aggressive-than-expected 750-point rate hike in August, has maintained that inflation will likely approach 62% by the end of this year, reaching the upper boundary of its earlier forecast. Turkey's economic future now hangs in the balance as the government's bold policy shift continues to unfold.