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Turkey plans big interest rate hikes as inflation to hit 65%

REUTERS/Hannah McKay
President Erdogan expects tight monetary policy to help bring down inflation to single digits again.
  • Erdogan says tight monetary policy will lower inflation
  • Economic growth seen 4.4% in 2023, 4% in 2024
  • Central bank hiked rates aggressively to 25% from 8.5%

Turkey jacked up its inflation forecasts and cut those of economic growth on Wednesday, as President Tayyip Erdoğan appeared to endorse the big interest rate hikes that are driving a turnaround toward more orthodox policies.

Since the policy U-turn began in June, analysts have applauded what they said was a more realistic effort to address years of soaring inflation, but cautioned that the short-term economic pain could test Erdoğan’s patience.

The government said it sees annual inflation rising to 65 percent by year end before dipping to 33 percent next year, up from 24.9 percent and 13.8 percent, respectively, in forecasts it published a year ago.

It trimmed GDP growth forecasts to 4.4 percent this year and four percent next year – which is still higher than most economists expect – from five percent and 5.5 percent previously. The current account deficit is expected to be $42.5 billion in 2023 and $34.7 billion in 2024.

The forecast in Ankara’s annual “medium-term programme” is seen as a milestone in a broader policy U-turn that began in June when Erdoğan named a new cabinet and central bank chief.

The central bank has since aggressively hiked rates to 25 percent from 8.5 percent.

“With the support of tight monetary policy, we will bring down inflation to single digits again and improve the current account balance,” Erdoğan said in presenting the programme.

“We will definitely not compromise on economic growth during the period of this programme,” he said.

The comment marks a rhetorical pivot for Erdoğan, who for years had openly opposed high rates on the unorthodox grounds that they stoke inflation, and who once described himself as an “enemy” of interest rates.

But after his May re-election, Erdoğan – faced with deep economic strains and badly depleted forex reserves – named Finance Minister Mehmet Simsek and Central Bank Governor Hafize Gaye Erkan to start hiking rates and begin freeing up credit and forex markets.

The lira has since shed 25 percent and, largely due to this depreciation, annual inflation jumped to near 59 percent last month. The currency was stable at 26.8175 to the dollar at 13:02 GMT.

The programme’s GDP forecasts imply Ankara predicts the lira will trade on average around 23.9 this year and 36.8 next year.

Slowing economy

The economy is expected to slow through year-end – and ahead of nationwide municipal elections set for March next year – as stimulus tied to the May elections fades and as the 1,650 basis-points in rate hikes start to weigh.

A Reuters poll last month showed expectations of 2.9 percent full-year growth, lower than trend in the emerging market economy that seeks to reverse a years-long exodus of foreign investors.

Erdoğan has fired four central bank governors in four years. His past push to slash rates despite rising prices led to a historic currency crash in late 2021 and sent inflation to a peak above 85% last year.

“The risk is ever-present that Erdogan could lose patience,” said Commerzbank analyst Tatha Ghose.

Inflation will “be very high for an extended period of time, which will trigger second-round effects such as wage settlements.”