Turkish inflation slows, prompting talks on rate cuts

Turkish inflation dipped last month, spurring discussion about possible interest rate cuts by Turkey’s central bank.

Government officials, including Deputy PM Mehmet Simsek, believe that it’s only a matter of time before the central bank is encouraged to cut their rates.

President Recep Tayyip Erdogan has always firmly opposed the central bank using high interest rates to curb inflation. Now, he says a reduction in rates presents a risk for the economy as it seeks to redress a trade deficit, narrow its large current account gap, and relieve pressure on the lira.

Deputy PM and former economist Mehmet Simsek

Simsek, a former economist, said last week that while inflation remains in double digits, the central bank will keep rates high. To reach single digit inflation, the central bank will need to take appropriate measures, and the government would need a strong fiscal stance to keep prices in check, he said.

January saw inflation slow from December’s figure of 11.9 percent to 10.4 percent, a six-month low. However, Turkey’s inflation rate is still alarmingly high: more than three times the average for emerging market economies.

Graph showing current CPI and inflation in Turkey

Erdogan: firm on interest rates

Erdogan has long believed that high interest rates correlate with high inflation - rather than the conventional opposing view. Erdogan also believes that cost pressures on industry and imperfect competition drive inflation rates skyward, rather than excess consumer demand. As a leader who likes to surround himself with others who share his views, Erdogan’s views are confirmed by his economic advisors.

Erdogan’s chief economic advisor Cemil Ertem has pointed out that the latest slowdown is testament to what has become known as “Erdoganomics”, namely, the government measures to increase manufacturing output and tackle food prices. These results indicate Turkey is winning its battle with inflation, Ertem says, adding that traditional economic theories that say interest rates should be used to curb price rises are outdated.

Erdogan urges central bank to play a more active role in bringing down interest rates

The Central Bank’s outlook for inflation is 7.9 percent by the end of the year, a figure that experts believe is pure wishful thinking. The bank’s medium-term target for inflation is five percent, an objective it has failed to meet for seven years.

Last week Erdogan said the central bank and state-run lenders needed to play a more active role in bringing down interest rates. Turkey’s private banks have been making huge profits with loans carrying interest rates of up to 20 percent, a practice that must end, said the president.

With presidential and parliamentary elections fast approaching, the government has even more motivation to ease its monetary policy. Whether this will have a knock-on effect on inflation remains to be seen.


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