Massachusetts Institute of Technology (MIT) economics professor Daron Acemoğlu spoke to Reuters last week regarding inflation figures announced by Turkey’s Central Bank (TCMB) for February, as well as their projections for the remainder of 2024, describing the numbers as ‘unrealistic’.
The numbers released by Turkey’s central Bank at the end of February forecast inflation peaking at 73% in May, and finishing 2024 at 36%. Criticizing the projection, Acemoğlu said “If they keep tightening at negative real interest rates, it won’t be enough,” suggesting that the projected inflation numbers would not be met.
Structural problems in the Turkish economy
Acemoğlu criticized structural problems in the Turkish economy due to policies pursued over the past 10 years, particularly the government’s attempt to increase total demand using monetary and credit policies. These policies, according to Acemoğlu, forced the government to increase interest rates. “But then they reduced interest rates again and then increased them again, and I think this became quite unsustainable,” said Acemoğlu.
Interest rates stay fixed ahead of local elections
On March 31, Turkish voters head to the polls to cast their votes for candidates in local elections, in which mayors across the country will be elected to terms lasting five years. Major cities held by the opposition, including İstanbul and Ankara, will be heavily contested by President Recep Tayyip Erdoğan’s ruling Justice and Development Party (AKP).
In February, the TCMB held Turkey’s interest rate fixed at 45%. Acemoğlu described this as a tactical choice heading into the upcoming elections saying extreme monetary tightening ahead of the contest would be unacceptable for the ruling party: “Measures that dramatically reduce demand would be unacceptable for Erdoğan, considering that the election is right around the corner,” he said.
Turkey attempts to solve longtime struggles with inflation
Turkey has struggled with persistent inflation problems for decades. Years of runaway devaluation saw the Turkish Lira reach over one million to the US Dollar before a revaluation in 2005 that removed six zeros and introduced a new currency called the ‘Yeni Turkish Lira’. Relatively stable throughout the late 2000s and early 2010s, inflation became persistent towards the end of the decade, marked by sudden devaluation events in late 2018 and again in late 2021, the latter driven largely by Erdoğan’s insistence on lowering interest rates.
Following Erdoğan’s reelection in June 2023, Turkey’s Central Bank hiked interest rates for the first time in 27 months, after which Daron Acemoğlu sat down with Medyascope Editor-in-Chief Ruşen Çakır to discuss the new changes. Along with the interest rate hike, Erdoğan’s hiring of economist Mehmet Şimşek as Minister of Treasury and Finance was interpreted as a return to economic orthodoxy by many observers. Şimşek had previously served in the role between 2009 and 2015, overseeing Turkey’s recovery from the global financial crisis of 2008.
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Despite successive interest rate hikes over the past nine months, the Lira has continued to steadily lose value against the US Dollar, going from around 21:1 in early June to just over 31:1 at the beginning of this month.
Written/translated by Leo Kendrick for Medyascope
