Erdoğan’s ‘growth over inflation control’ policy taking Turkish Lira on a ride – analysis


Markets have been desperately waiting on interest rate hikes by Turkey’s Central Bank; however, President Recep Tayyip Erdoğan’s calls to keep rates low to push growth numbers has led to Turkey’s lira hitting record lows during the past week, CNBC news site says.

Noting that the fall of the Turkish lira has been accelerated by geopolitical uncertainty over U.S. and Russian military actions in neighboring Syria, Natasha Turak highlights that the policy of prioritizing growth over inflation control, ‘’has unnerved emerging market investors for some time now.’’

Erdoğan, as a self-proclaimed  “enemy of interest rates,” has stood against any central bank tightening, despite inflation sitting at a lofty 10.23 percent, Turak recalls. ‘’Turkey’s treasury bond yields, meanwhile, have hit multi-month highs and its February current account deficit increased by more than 60 percent on the same period in 2017 to $4.152 billion.’’

Pointing out that while Turkey’s growth has been impressive – with real GDP growth in Turkey reaching 7.4 percent for 2017, more than twice the previous year’s growth rate and the highest in the G20 – Turak explains that this rate of growth comes with its own risks.

Turak quotes Adrien Pichoud, portfolio manager and chief economist at SYZ Asset Management:

“The economy is overheating and has some large imbalances: double-digit inflation and a ballooning current account deficit, both of which are reflected in a weak currency.”

Turkish officials and bankers, however, as Turak points out, argue that ‘’Turkey is a special case that warrants unorthodox policy, due to its young and rapidly growing population and the need to create jobs.’’

With Erdogan focused on Turkey’s November 2019 elections, it is unlikely that economic growth will not come first for his ruling AKP, the CNBC article asserts.

Turkey’s economy grew 11.1 percent on an annual basis in the third quarter of 2017, raising criticism that the economy was overheating on the back of a government stimulus program focused on loan guarantees and tax breaks.

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