The Turkish head of state Erdogan agrees to the change in financial coverage below Simsek

Turkish President Recep Tayyip Erdogan has appointed former economic chief Mehmet Simsek as his new finance and finance minister.

Source: World Economic Forum

Turkish President Recep Tayyip Erdogan appeared to make a crucial shift in the future of his inflation-plagued country’s monetary policy on Wednesday.

Erdogan said he will endorse his new finance minister’s interest rate outlook in Turkey, which marks a return to economic orthodoxy after years of heavy state control over the central bank and a refusal to raise interest rates despite rising inflation.

The newly appointed finance minister, Mehmet Simsek, who previously served as deputy prime minister and finance minister between 2009 and 2018, is well respected by investors. Economists and analysts see in Simsek someone who can turn the tide in Turkey’s cost-of-living crisis Turkish lira The value against the dollar has fallen by around 80% in the last five years.

“Some of our friends shouldn’t be wrong, like asking: ‘Will our president seek a serious change in interest rate policy?'” Erdogan told the press on Tuesday, according to a Reuters translation of Turkish media released on Wednesday. The President referred to his opposition to raising interest rates, which he said has not been changed.

“But in the opinion of our finance and finance ministers,” Erdogan added, “we have accepted that he will take steps quickly and conveniently with the central bank.”

Erdogan has long proclaimed a staunch opponent of interest rates, refusing to raise them even as inflation topped a staggering 85% in late 2022, insisting any hike would hurt the economy. Economists and critics say his policies have continued to hurt the lira and fuel inflation, leading to a currency crisis.

The lira was trading near a record low of 23.58 against the dollar as of 4pm local time on Wednesday.

Inflation in the country of 85 million people rose 46.62% year-on-year in May – the same month that Erdogan was re-elected president, entering his third decade in power. Some economists predicted a collapse of the lira if Erdogan continues his current course of unorthodox monetary policy, which has caused many foreign investors to flee in recent years.

Turkish President Tayyip Erdogan addresses the media after a cabinet meeting in Ankara, Turkey, December 8, 2021.

Murat Cetinmuhurdar Reuters

Simsek’s appointment in early June instilled some confidence among investors.

“It looks like Erdogan has given Simsek a mandate to increase [rates]. That’s positive,” Timothy Ash, emerging markets strategist at BlueBay Asset Management, told CNBC on Wednesday. “He clearly says he disagrees with orthodox monetary policy but is willing to support Simsek for now.”

Erdogan also appointed Hafize Gaye Erkan as the new governor of the Turkish central bank. Together, Erkan and Simsek could lead to severe fiscal and monetary policy changes that would have to be painful at first, Goldman Sachs predicted in a research note.

A “fully orthodox policymaker” would allow the exchange rate to adjust itself and raise interest rates significantly, wrote Clemens Grafe, an economist at Goldman.

“In our view, this suggests that an orthodox politician would hike rates to 40%, the current level of deposit rates,” he said, adding that the country’s benchmark interest rate could be cut to around 25% once the inflation stabilized. until the end of the year. The current interest rate in Turkey is 8.5%.

However, many are still skeptical that Erdogan will truly relinquish his influence over central bank actions. Within months of 2021 alone, Erdogan fired four senior central bank officials who didn’t share his economic mindset, and the new Erkan will be Turkey’s fifth central bank governor in just four years.

Orcun Selcuk, an assistant professor of political science at Luther College, expects Erdogan to allow economic orthodoxy to prevail — with a particular eye on potential local elections.

“I think Erdogan is ready to calm down until the local elections,” Selcuk said. “He is keen to retake Istanbul and Ankara, where the economic crisis and higher cost of living are being felt the most.”

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