Istanbul Analysts and investors are suspicious of the Turkish government's forecast for inflation over the next two years. While the administration of Recep Tayyip President Erdogan assumes that the price increases will decrease to 8.5 percent by the end of the year, the currency experts of Turkish financial houses expect inflation of 10.01 percent.
The next interest rate decision is due this Thursday. This should show whether the central bank is following market developments – or the dictate of the Turkish president.
Erdogan's ministers argue that because of falling inflation, interest rates could be cut further to boost the economy. The country's financial analysts appear to disagree.
"It seems that markets don't trust government inflation expectations," said an investor comment from Oyak Research. In the analysis house, 10.5 percent inflation is expected by the end of the year, two percentage points more than the government.
A further rate cut could fuel price developments in the country again. That would be a threat to economic development in Turkey. If prices rise more than expected, consumption is stalled. Then there will be no money for new investments, which in turn will lead to job losses.
The interest rate decision on Thursday could therefore become an important compass for the development of the country. If Erdogan plays too high, a relapse threatens – not only economically but also politically.
Slump in summer 2018
Economic development in Turkey was the guarantor of Erdogan's political survival for almost two decades. The Turkish economy suffered from inflation rates of up to 140 percent per year until the late 1990s.
When the economically liberal AKP took office, the time was over. Price increases rarely exceeded 10 percent for more than 15 years.
Until summer 2018: The arrest of an American pastor in Turkey led to a tough diplomatic dispute with the United States. In October 2018, inflation rose to over 25 percent over the year. The prices of some staple foods like vegetables have more than doubled since then.
Economic growth was choked by high prices: the Turkish economy was in recession for half a year. Political annoyance grew with the economic difficulties.
The ruling AKP suffered several defeats in the local elections in June 2019. In most of the country's major cities, the opposition gained power over city halls, such as Istanbul, Ankara and the holiday capital of Antalya.
Since then, Erdogan has been doing everything to lower inflation. A means of his choice: interest rate cuts. "I have an allergy to interest," he said in the summer.
And since then, the key interest rates have dropped from 24 to 12 percent. Inflation also dropped to 11.84 percent for end consumers. "If interest rates fall, inflation will also become weaker," Erdogan believed – and was largely right.
Now the government in Ankara expects inflation to drop to 8.5 percent by the end of the year. The assumption is supported by economic growth and the hope of a stable oil price.
But the conflict between the United States and Iran could hit Turkey economically if oil prices rose as a result. An industrialized country like Turkey is heavily dependent on the oil price, warns Mohammed Ali Yasin chief strategist at Al Dhabi Capital, a financial analysis service.
"A further escalation of geopolitical tensions would have devastating effects on Turkey." The price of oil had risen to just under $ 70 as a result of the US killing an Iranian general in early January, but has eased slightly since then.
Penalties for usury prices
The pressure on the currency not only comes from abroad, but also arises in Turkey itself. Last year, the government took measures to curb the price increases for basic foodstuffs, for example with penalties for usury prices at food wholesalers.
The labor market figures speak for an economic recovery. Every fourth young person in Turkey is unemployed. But the overall quota recently declined slightly, because 210,000 new jobs were created within a few months, particularly in industry and services.
In addition, at the beginning of the year the government raised the minimum wage in the country by 15 percent, from 2021 lira to 2325 lira (356 euros). Around a third of all employees in Turkey earn only the minimum wage.
An increase therefore results in a sudden increase in the purchasing power of many people – and should therefore encourage sellers to increase prices. The central bank would then be more likely to keep interest rates tight so that the economy does not overheat.
The Turkish population still seems unsure how the ruling AKP will solve the price problem. In two surveys, the majority of those questioned said that they had lost hope for the future. 15 percent of the respondents did not know who to vote for in the next election. The government party is already lying head to head with the opposition in polls.
Financial news service Bloomberg believes that the central bank has little scope for further rate cuts. Other experts believe a maximum of 50 basis points (0.5 percentage points) lower key interest rates make sense.
The analyst Atilla Yesilada can imagine a maximum of 100 basis points. "If you think about how strongly Erdogan is convinced of his own theory that lower interest rates will depress inflation, a more pronounced rate cut is the more likely option."
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