Turkish President Recep Tayyip Erdogan is fully onboard with new policies that require monetary tightening, according to the country’s finance minister, in the latest show of unity over ending an era of cheap money.
(Bloomberg) — Turkish President Recep Tayyip Erdogan is fully onboard with new policies that require monetary tightening, according to the country’s finance minister, in the latest show of unity over ending an era of cheap money.
“Our president gives full support, be it the disinflation program, be it fiscal policy,” Mehmet Simsek told reporters in Ankara. “We are not just sensing this, we are also seeing it.”
Simsek, appointed in June shortly after Erdogan’s reelection, joined a round-table on Thursday together with central bank Governor Hafize Gaye Erkan and other top officials. The discussion followed a day after the government unveiled its fresh targets through 2026 that showed inflation will remain in double digits for years to come, accompanied by trade imbalances and economic growth between 4% and 5%.
“All tools will be used in monetary tightening until there’s visible improvement in inflation,” Erkan said.
The comments mark an attempt to dispel concerns about the extent of Erdogan’s commitment. The Turkish leader has removed three central bank governors in recent years for not being dovish enough.
Investor skepticism is still evident in the currency market, with the lira weakening slightly for five straight days. In the two weeks since a jumbo rate hike to 25% propped up the Turkish currency, it’s lost almost 4% against the dollar, the worst performance in emerging markets in that period.
The government’s program is “a declaration of intent rather than a roadmap,” said Wolfango Piccoli, co-president of Teneo Intelligence in London. Erdogan’s remarks “do not mean that he has abandoned his unorthodox views and, more critically, do not mean that Turkey’s new economic team has complete freedom to act in reining in inflation,” he said.
But the effort is starting to make an impression on some economists at top global banks, which have already been rethinking the path of Turkish borrowing costs. On Thursday, JPMorgan Chase & Co. and Morgan Stanley raised their rate forecasts for Turkey, with both now predicting a hike of 500 basis points in September.
“Ultimately, we have higher conviction that the shift to orthodoxy now has durability and political backing, so we believe markets can more comfortably price outsized central bank rate hikes,” JPMorgan analysts including Fatih Akcelik said in a report. “Accommodative fiscal policy may require tighter monetary policy to tame inflation.”
Erdogan, who attended the presentation of the medium-term program, voiced support for monetary tightening and appeared to abandon his long-held beliefs that ultra-low interest rates could curb inflation. A new team of technocrats he installed in recent months have pushed interest rates higher and moved to scale back some of the unorthodox policies that destabilized the $900 billion economy.
“There’s not even the slightest hesitation” in Erdogan’s position, Simsek said. “We will continue doing what this program requires.”
Erdogan, in the same speech on Wednesday, also said Turkey wouldn’t compromise on economic growth, a view reminiscent of his approach ahead of recent elections that sought to pump up activity. A period of ultra-loose rates had contributed to already-high inflation that surged above 85% last October.
Under the latest outlook, the government sees inflation accelerating to 65% at the end of this year.
Erkan said price growth could end the year higher than the upper band of central bank’s forecast. The governor, a former Wall Street banker, will present the central bank’s new inflation projections in November.
“Disinflation is our priority,” the central banker said. She refrained from mentioning a terminal rate, saying “it’s not right to put out interest-rate numbers.”
According to Bloomberg Economics, the government’s program through 2024 assumes a sharp depreciation in the lira.
What Bloomberg Economics Says…
“Turkey’s switch to orthodox policies has seen a full gamut of changes, including top economic personnel and the central bank reversing policy to hike rates by a cumulative 1650 basis points since the May elections. The new direction may now have the President Erdogan’s verbal support, but even with the best intentions, it will take a long time to undo the damage from the previous actions.”
— Selva Bahar Baziki, economist. Click here to read more.
Simsek said, however, that the exchange rates built into the program aren’t levels that need to be attained but instead will be determined by demand and supply in the market. Turkey doesn’t have a target for the lira, according to the finance minister.
It would be “wrong to assume that the lira will continue in a linear” way, Simsek said. “There’s no change in the exchange rate regime.”
Simsek and Erkan refrained from providing a roadmap for winding down the country’s emergency lira savings program that’s indexed to the exchange rate. The mechanism was introduced by their predecessors in late 2021 and has since become a massive burden on state finances.
The finance minister said an exit strategy would emerge once Turkey strengthened its foreign reserves.
Read more: Lira Lifeline Became $124 Billion Problem That Haunts Turkey
Simsek said he’ll set off on a series investor meetings abroad from Friday, starting with India for a Group of 20 gathering and then on to Germany and a trip to the US with Erdogan for the United Nations General Assembly. The minister said he’ll meet top companies in Germany and could later visit London, Asia and the Middle East.
Turkey is in “strong dialogue” with credit-rating firms, portfolio managers and investors, he said.
–With assistance from Kerim Karakaya.
(Updates with analyst comments starting in seventh paragraph.)
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