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The Turkish central bank announced on Thursday that interest rates were cut more than expected-this is the latest in a series of policy measures that investors have punished the lira. Economists warned that Turkish consumers will face more inflationary pain.
Central bank policymakers headed by Governor Sahap Kavcioglu lowered Turkey’s benchmark interest rate by two percentage points to 16%-a sharp drop that exceeded most forecasts.
Prior to the announcement, President Recep Tayyip Erdogan fired three central bank policymakers at midnight last week. Erdogan often blames high interest rates on the country’s Inflation-this view is contrary to the view of most economists.
Turkey’s prices have been soaring, and the country’s annual inflation rate in September was slightly below 20%.
In the past two and a half years, three central bank governors have been fired by the government, which has raised questions about the independence of the central bank from opposition leaders and some of the country’s most important trade groups.
Earlier this month, the leader of Turkey’s largest opposition party even took the step of visiting the central bank to personally express his concerns.
The leader of the Republican People’s Party (CHP), Kemal Kilicdaroglu, told reporters that he wanted to encourage the agency to exercise its independence. GlobalSource Partners analyst and economist Atilla Yesilada (Atilla Yesilada) said that opposition leaders’ visits to the central bank are largely unprecedented.
“Kilicdaroglu’s main purpose is not to ask what happened, but to remind the central bank governor that if he continues to cut interest rates, he will bear the legal responsibility,” Yesilada told Al Jazeera.
Lira punished
Opposition leaders strongly condemned Thursday’s interest rate cut on social media. Kilicdaroglu said that Erdogan and the bureaucrats who followed him are “leading the country to hunger,” and their behavior is either a sign of “betraying the country or a health problem.”
The leader of the country’s third largest opposition party, Meral Aksener, called it “an irrational decision made by a reckless government through an unqualified bureaucrat.” Former Prime Minister Ahmet Davutoğlu stated that “the central bank does not seem to fight inflation, but is under political control.”
Within an hour after the central bank announced the interest rate news on Thursday, the Turkish lira exchange rate against the US dollar hit a record low of 9.49.
This year alone, the lira has depreciated by more than 20% against the U.S. dollar-this rapid erosion has had a domino effect on other parts of the economy and has stirred up disturbing concerns about the inflation cycle that swept the country in the 1990s. recall.
Within an hour after the central bank announced interest rates on Thursday, the Turkish lira against the US dollar hit a record low of 9.49 [File: Murad Sezer/Reuters]“For most Turks, the strength of their national currency is also a barometer of their economic strength and health,” Yesilada said. “I went through the 1990s, when the depreciation of the lira immediately led to an increase in inflation. People just made future financial decisions based on the value of the lira.”
“This is a vicious circle,” Yesilada added. “And Turkey is on the verge of falling into that trap again.”
Just a necessity
There are signs that the country’s economic difficulties have pushed the Turks to the brink of collapse.
Every Wednesday afternoon, in the Carsamba neighbourhood of Istanbul, the street becomes one of the largest street bazaars in the country. Hundreds of stalls popped up overnight, displaying everything from fruits and vegetables to cheese and olives, transported from trucks outside the city to the narrow streets. Istanbul’s weekly markets usually offer the best prices — sellers claim that prices will fall over time — but even here, the cost of basic goods will increase every few weeks. Eggs, onions, potatoes, tomatoes, olives, peppers-most of the dietary necessities provided by families around working-class communities fluctuated greatly in the past year, sometimes doubling.
One block away, a steady stream of shoppers lined up to buy bread from a store that sells bread subsidized by the city government. In a nearby grocery store, the owner was a fat man with a gray beard, who asked not to be named. He wrote down the price of each item in a smooth script on the card and which country they came from, he said He will change the current day every few times.
“Everything is going up here, even last month,” he told Al Jazeera. “These chestnuts, these grapes, they have doubled. Look at that cooking oil, now a can is 70 lire,” he said, pointing to the large container stacked near the entrance. “You can’t live without cooking oil. People are buying things, but they mainly buy what they need, and they buy more quantities because they know it will be more expensive next time they shop.”
“People now leave their children at home when they come to shop, or they must tell them not to buy snacks or sweets,” said Hayati, who owns a corner store nearby that sells bread, eggs, cheese, deli meats and other foods. Basic. “People are buying half of the portion. People who used to buy a whole sausage now want half, half cheese, half yogurt, just like this.”
People are buying half
Hayati has a booklet that says the person he is credited with, but he has also become more critical about it. “Our rent has increased from 1,500 lire per month to 3,000 lire per month, so we can’t trust more people, only the families I know and trust.”
Like many Turks of a memorable age, Hayati said, the current situation is not as bad as it was in the 1990s, when the country experienced triple-digit inflation and ridiculous currency devaluations.
“But at the time, people didn’t have as much debt as they do now,” Hayati said. “Today, we have smartphones, electronics, and all these things that people want to show that they have a comfortable lifestyle. They are in debt to maintain this appearance. In the 90s, poverty was not a problem, nor was it a shameful thing. “
At the same time, the government’s efforts to solve the food price problem have not been proven effective. Before the local elections in 2019, the authorities set up stalls across the country to sell vegetables directly to consumers at lower prices in order to combat what President Erdogan said at the time that price manipulators “intimidated” society. Thousands of people lined up to buy agricultural products from the stalls, but they disappeared shortly after the election.
Everything here is going up, even in the last month
In the past few weeks, Erdogan has ordered an investigation into the country’s largest chain store for alleged price hikes and promised to expand farmers’ cooperatives. He said he would cut off middlemen.
Utilities that supply necessities such as natural gas are already in debt, mainly denominated in foreign currencies. The same is true for Turkish banks. More than 50% of bank debt in the private and public sectors is denominated in foreign currencies, so whenever the lira depreciates, these debts become more difficult to repay.
Rents in most cities, including Istanbul, have risen by at least 50%, and families relying on the minimum wage (currently only 3,577 lire ($378) per month) are increasingly struggling to make ends meet.
For example, nearly 300,000 bills have been paid through the Istanbul Municipal Plan established last year, which allows anonymous donors to pay for the utility bills of households with a per capita income of less than 940 lira (US$94).
Cycle of distrust
Some of Turkey’s most important trade associations and tycoons have expressed rare concerns in the past few weeks, which have particularly raised concerns about the apparent lack of independence of the central bank.
Omer Koc, the head of Koc Holding, said earlier this month that the country needs to pursue a “fundamental reform agenda”.
President Koc and Erdogan have experienced political tensions, and he has remained largely silent on the country’s economic recession in recent years.
“It is clear that for our country’s peace and sustainable economic growth, we must act rationally and scientifically,” Cork said.
Koc Holding includes contracts with the country’s largest oil refinery and car manufacturer, and in 2020 will account for 6% of Turkey’s GDP.
The Turkish Industry and Commerce Association responded to a call to respect the independence of the central bank earlier this week. The association represents approximately 4,500 companies and accounts for 85% of the country’s foreign trade.
University College Cork-Director of the TUSIAD Economic Research Forum and former Director of the Center for American Economic Research Selva Demirapp said: “There is considerable turbulence in society and the poverty rate is rising. These institutions may express these concerns on behalf of the society. “U.S. Federal Reserve Board economist.
Demiralp said that companies that rely on imports have stated that they are at risk of bankruptcy when the exchange rate of the lira against the US dollar is 8, and that the interest rate has now been pushed higher, not only to continue business as usual, but also to increase costs. Pay off debts that have been mainly denominated in foreign currencies in recent years.
The power of the central bank to control inflation is its interest rate policy. Demiralp said that despite economists’ calls for maintaining high interest rates, policymakers are reducing borrowing costs, failing to achieve their inflation target of around 5%, and creating a “inertia” of mistrust based on actual inflation. This is at least 20%.
Demirapp told Al Jazeera: “The central bank’s policies have never been tight enough. This is the main reason for this inertia.” [inflation] The goal, but also getting farther and farther away from the goal. Therefore, when you price a contract, you will see the actual inflation of the previous year, not the central bank’s target. “
In economies where central banks seem to be able to accurately measure inflation, lower policy rates will also cause market interest rates to fall. “But what we saw in Turkey is just the opposite,” Demiralp said.
“The central bank is cutting interest rates but it is counterproductive. It is actually raising long-term interest rates… It is increasing risk and is inconsistent with the country’s macroeconomic fundamentals, because when you see that your actual inflation rate is about four times yours You don’t have any room to cut interest rates.”
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