How to manage inflation: the Turkish case


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The forecasts of the 3.1% inflation with which we have closed 2021 are disorienting our euro countries. The economies that had their hopes of recovery pinned on this year lower their expectations due to the stubbornness of prices, but that is not nothing compared to the case of Turkey, out of control. In December its inflation rate exceeded the 30% mark and ended the year at 36.08%, the highest price level in the last two decades. The data had created expectations about the meeting held today in Ankara by the Central Bank of Turkey, but the entity has followed in the footsteps of the ECB and has left the reference rates as they were, which remain at 14% with the hope that the passing phenomenon dissolves by itself.

“It is not necessary that we all act like the Federal Reserve”, Christine Lagarde celebrated this morning, who is of the same opinion on the “temporary” problem and who considers that what “would be favorable is a rise in wages”. But Turkey's situation is not directly comparable to ours because we have the euro and they have the lira, which has lost more than 50% of its value since last year and has in turn contributed to the upward spiral of imported products, including many foods.

In recent months and under pressure from Turkish President Recep Tayyip Erdogan, the Central Bank of Turkey has been lowering the key interest rate from 19% to 14% since the summer, when the doctrine dictates the opposite movement in these cases. Shortly before Christmas, Erdogan announced a comprehensive package of measures, the core element being a state guarantee for private savings against foreign exchange losses. He has also assured companies that they will be able to protect themselves against the risks of high exchange rate fluctuations and, after much speculation about the introduction of capital controls, Erdogan has guaranteed that Turkey has "neither the intention nor the need to give the smallest step away from the free market economy and the free exchange of currencies. This week he has called on citizens to bet on the national currency, instead of buying dollars, euros and gold, and thus prevent its collapse, thus implicitly acknowledging the failure of the measures. “The political decisions that have been implemented have not only created new difficulties for companies, but also for citizens,” protests a spokesman for the Turkish Business and Industry Association (TÜSIAD), which represents more than 80% of the companies. exporting companies in the country, "it is necessary to assess the damage to the economy and return to the principles established in a market economy."

The rise in wages that Lagarde has mentioned in her latest statements, in an interview with France Inter, had also occurred to Erdogan before, who to placate discontent has announced a 50% rise in the minimum wage up to 4,250 Turkish liras, about 240 euros. “With this increase, I think we have shown our determination not to allow workers to be crushed by the weight of prices,” he justified, but he did not manage to keep the lira losing value. Now, Erdogan's plan requires Turkish banks to offer their clients, as long as they are natural persons, the option of depositing money in a lira-denominated account for 3, 6, 9 or 12 months, at an interest rate according to the one set by the Central Bank and writing down its value in dollars according to the exchange rate of that day. If at the expiration of the term, the value of the capital plus interest is greater than the value in dollars of that day, no tax will be charged at source. But if it is lower, the customer will be paid the difference. The State will have to disburse immense sums of public money.

“It is a very dangerous situation because fiscal and monetary policies have become intertwined, when in a healthy economy they would be independent,” says Ipek Ozkardeskaya, an analyst at Swissquote Bank, “it is the Treasury that assumes the pressure on the currency and will have to take out the money of taxes or increase the deficit. And this does not reduce inflation but increases it, ”adds the economist Mustafa Sönmez. Refet Gurkaynak, an economics professor at Bilkent University in Ankara, describes the new situation as "in effect a sharp rise in interest rates", although it only benefits deposit holders at the expense of taxpayers, so will have negative implications for income redistribution.

It seems clear that Erdogan is wrong, but he had tried the opposite tactic before and it did not work either. Interest rates in Turkey went from 8% to 24% three years ago and all it got was a recession, which is what the ECB is afraid of. Then, during the pandemic, he resorted to rate hikes again and again it didn't work out. The Turkish case shows that monetary policy is a balm of Fierabras and that inflation, once it sinks its claws into an economy, is not so easily frightened away.

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