With inflation in Turkey galloping at 83 percent in September, the country’s central bank cut its key interest rate from 12 percent to 10.5, adhering to Turkish president Recep Erdogan’s insistence that low interest rates reduce inflation.
The depth of the cut surprised analysts.
Factoring together a 10.5 interest rate and 83-percent inflation, an investment denominated in lira, the Turkish currency, is losing about 72 percent a year, among the worst rates in the world, the Financial Times noted.
Erdogan is preparing a re-election campaign next summer and has staked his shrinking public popularity on his “new economic model” in which low interest rates crash the lira’s value, making Turkey’s exports cheaper abroad and sparking an economic and employment boom.
Erdogan also sees cheap credit as a winning political strategy among his supporters in small businesses and the construction industry, the FT said.
“As long as this brother of yours is in this position,” Erdogan said in a rally earlier this month, “interest rates will continue to come down with every passing day, week, and month.”
The Central Bank of the Republic of Turkey has been cutting interest rates for more than a year, except for a brief reversal in late 2021, yet inflation has increased at the same time.
“These policies do not seem sustainable, but it seems the economic management will try to maintain this approach until the elections,” Haluk Bürümcekçi of Bürümcekçi Research & Consulting in Istanbul told the FT.
PUBLISHER’S NOTE: As we reminded readers in “Only in Turkey: Inflation Rises, Interest Rates Fall” (27 Sep 2022), we have documented Erdogan’s long, losing battle with economic reality in a series of articles, including:
- “Turkey’s Central Bank Governor Fired After Rate Hike” (23 Mar 2021)
- “Turkey’s Financial Markets Crash After Agbal Firing” (30 Mar 2021)
- “Turkey: Another Day, Another Central Bankster Fired” (1 Jun 2021)
- “Turkey: Interest Rates Down, Lira Crashing. War Next?” (19 Oct 2021)
- “Turkey’s Economy Continues to Implode” (14 Dec 2021)
- “Turkey’s Inflation Rate Nears 50 Percent” (8 Feb 2022)
- “Turkey’s Bonds Downgraded, Worse to Come” (22 Feb 2022)
- “Turkey’s Economy Weakens Further Under Erdogan’s Policy” (14 Jun 2022)
We expect the list to grow longer in the months ahead.
TREND FORECAST: Erdogan has become so deeply invested in his economic policy that he will not abandon it with his campaign for re-election already under way.
Instead, as next year’s election nears, we expect Erdogan and his hand-picked sycophants at Turkey’s central bank to put up new short-term measures that will loot the bank’s reserves to give the lira CPR.
As he becomes more desperate, domestic protests will increase. This will give Erdogan a pretext to find “terrorists” and “foreign troublemakers” among his critics, cracking down even more on personal freedoms and increasing the chances of a rigged election in his favor next year.
Ultimately, as Turkey’s economy continues to limp, Erdogan may seek to distract his nation and strengthen his hand through military action. As Gerald Celente often says, “When all else fails, they take you to war.”