Vacationers happy, Turks not
Erdogan’s joker cannot prevent the lira from falling
06/07/2023, 8:55 p.m
With the appointment of a new finance minister, Turkish President Erdogan wants to regain the confidence of the financial markets. But that hasn’t worked so far. The national currency continues to lose value.
The rapid descent of the Turkish lira continues. The national currency falls to new historic lows against the euro and the dollar. Yesterday, Wednesday, the lira had lost around seven percent against the dollar – that is the largest daily loss in two years. The lira has already lost around 25 percent of its value this year, after having gotten under the wheels in previous years.
This is surprising because President Recep Tayyip Erdogan appointed the experienced economist Mehmet Simsek as finance minister after his election victory. He had announced that his country was returning to “rational principles” in economic and financial policy. It remains to be seen to what extent Erdogan will give him a free hand. Simsek was Turkey’s finance minister in 2009 and 2018.
Erdogan describes himself as an “interest enemy”, sees interest rates as the “mother of all evils” and advocates an unorthodox monetary policy. Contrary to economic theory and past practical experience, he argues that low interest rates mean low inflation and high interest rates mean high inflation. Erdogan fired several central bank governors and finance ministers to push through his desire for low interest rates.
The head of the statistics authority also had to go last year. Erdogan accused him of exaggerating the extent of the inflation. According to official figures, inflation shot up to 85 percent last year. In May, general inflation was still just under 40 percent. To put this in context: The Istanbul-based independent inflation research group ENAG puts inflation at around 109 percent across the country.
“No monetary policy summer”
Regardless of how high the inflation actually is: the main reason for the rapidly rising prices is the weak lira. It makes imports – such as raw materials – more expensive. Erdogan’s desire for low interest rates is probably based on the calculation of ensuring economic growth. After all, cheap credit tends to encourage more consumption and investment. Also the export industry, since their products are becoming cheaper on the world market. For Turkey, which is characterized by tourism, there is also the fact that a weak currency makes holidays in the country more attractive.
One reason for the current slide in the lira could be that the Turkish central bank has meanwhile scaled back its intervention in the foreign exchange market. According to traders, she had been supporting the lira by selling foreign exchange ahead of the runoff due to political pressure.
“What investors in Turkey want to see is not how talented Mehmet Simsek is in finance, but how resilient he will be to the low interest rate pressures from the presidential office,” said Ipek Ozkardeskaya, an analyst at Swissquote, a Swiss online bank. Commerzbank analyst Ulrich Leuchtmann sees it the same way: “A finance minister doesn’t make a monetary policy summer.” An upcoming personnel decision by Erdogan should provide information about future monetary policy: the president wants to appoint a new central bank governor.