Turkish Economy Needs a U-Turn

How Turkey’s central bank plans to regain market confidence in the face of plummeting Turkish lira and increasing inflation remains a mystery, unless there is a U-turn in economic policies, economists Holger Schmieding and Carsten Hesse said in the Globalist.

Turkey’s economic indicators are deteriorating rapidly as a slump in the value of the lira curtails purchasing power and prompts foreign investors to pull more of their money out of Turkey’s stocks and bonds, Ahvalnews reported.

Credit Rating Agency Fitch on Tuesday cut Turkey’s growth forecast for next year by two-thirds, while ABN Amro expects Turkish lira, which has dropped by more than 40% since the beginning of 2018, to depreciate a further 20% to 8.2 per dollar by the end of the year.

Turkey’s central bank’s “half measures of mid-August–to tighten monetary policy without raising the main interest rate, and to attract some support from abroad without changing policies or turning to the International Monetary Fund–have not stopped the rot,” Schmieding and Hesse said.

“How Turkey’s central bank plans to regain market confidence that it will eventually hit its 5% inflation target again remains a mystery,” according to two economists and “only a credible U-turn in Turkish policies–raising interest rates, submitting to an IMF program and mending relations with the United States and the EU”—can change the course.

Though Turkey’s central bank signaled an adjustment in its monetary policy, after annual consumer inflation hit 17.9% in August, a change in President Recep Tayyip Erdogan dislike for interest rates is highly unlikely according to some analysts.

If the downward trend of Turkish lira continues, inflation in Turkey can increase significantly over the coming 18-24 months and reach 50%, Schmieding and Hesse said.