Turkey continues to cut interest rates despite rising inflation

Despite the fact that most central banks in other countries have tightened their monetary policies to combat inflation, the Central Bank of Turkey (CBRT) has decided to continue its policy of lowering interest rates. This economic strategy, promoted by Prime Minister Recep Tayyip Erdogan, is aimed at making credit cheaper and strengthening the domestic economy. Moreover, the president believes that this manoeuvre will serve to revive his popularity in the run-up to the country's general elections in 2023.

In this way, the country's economy continues to be subject to the doctrine that has characterised Erdogan since the beginning of his term in office; the 'Erdonomics' doctrine. This term was introduced by economic analyst Jeffrey Halley to refer to the conception that high interest rates are a brake on the economy and encourage inflation, as the Turkish president claims.

Therefore, in line with this approach at the end of last October, the TCMB announced an interest rate cut of 200 basis points, a total reduction of 16%. This came just days after the dismissal of several members of Turkey's central bank, surprising a population now facing inflation of more than 20 per cent. However, the governor of the TCMB, Şahap Kavcıoğlu, has already communicated that interest rates could still be cut further before the end of the year.

However, while these monetary policies may be of benefit to some, their implementation has been widely questioned by experts. "Growth fuelled by the credit boom is problematic. It is overheating the economy, fuelling inflation and putting pressure on the currency, and failing to attract the high-quality resources needed to improve welfare," Guldem Atabay, an economist at Global Source Partners, told Bloomberg News. 

Thus, the economic growth produced by this interest rate cut would be achieved at the expense of the country's working classes, those who are the current president's main voting base. Thus, rising inflation on imported goods - particularly food and non-alcoholic beverages - would hit the lowest income groups hardest, deepening the inequalities the country faces. 

Moreover, this is compounded by the weakening of the lira, whose value has fallen by 20 per cent against the value of the dollar since 2020. In fact, the Turkish currency has been ranked as the worst performing emerging market currency this year 2021, below the Romanian lei and the Polish zloty. 

Considering all these factors, the Turkish Central Bank is considering revising its inflation forecasts for the next three years, starting with the inflation forecast for 2021, which would rise from 14% to almost 18.5%. 

However, despite the inequalities and the inflationary crisis, the country's gross domestic product grew from 7.2 percent to 21.7 percent in the first two quarters of the year, according to the Turkish news agency Anadolu. "Although international organisations' estimates for this figure are 9%, we believe that we will reach double digits," said President Erdogan on the economic growth forecast for the end of the year. Thus, the big beneficiaries of these monetary policies have been manufacturers and exporters, who have seen their competitiveness grow in the international market due to falling production costs, and the big owners of Istanbul's real estate market, who have taken advantage of cheap loans to buy up real estate. 

Today, Erdogan's popularity is at an all-time low since his rise to power as prime minister in 2003. Due to the political and economic scandals in which he has been embroiled lately, and the galloping inflation that has been rising steadily for the past five months, the support of the popular classes that sustained him has fallen to its lowest level ever. 

Moreover, his authoritarian stance on the development of monetary and economic policies has led him to become the 'de facto' governor of the Central Bank of Turkey. Thus, in just over three years, Erdogan has dismissed three governors and two deputy governors of the TCMB for objecting to interest rate cuts and the sale of foreign exchange reserves. For the Turkish public, this has led to a sense of a lack of independence of the banking institution, and for investors, a loss of confidence in the Turkish lira.