Turkey may be in danger of slumping into a deeper economic crisis than it experienced two decades ago, said Kenneth Rogoff, a Harvard University economics professor and a former chief economist at the International Monetary Fund.
The government failed to increase interest rates when it should have done to tame inflation and has exacerbated Turkey’s economic problems by sacking central bank officials, one after another, Rogoff said in an interview with the Dünya newspaper published on Tuesday.
“At this point, it is very difficult for Turkey to bring down inflation without a serious interest rate hike. Controlling inflation will indeed be painful, as interest rates were not raised sooner and credibility was damaged by repeated dismissals of central bankers,” said Rogoff, who served as the IMF’s chief economist between August 2001 and September 2003.
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“Turkey may be headed for a worse economic crisis than it did two decades ago, but while the global growth and interest rate environment is still favourable enough despite the war, there is still time to prevent the economy from making a hard landing.”
Inflation in Turkey has surged to 54.4 percent, the highest level since 2002, after the central bank cut rates to 14 percent from 19 percent late last year. The lira slumped by 44 percent against the dollar in 2021, with most of those losses occurring after the rate cuts started in September as investors and local deposit holders sold the currency. The lira has fallen a further 10 percent this year.
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Twenty years ago, the country was emerging from a painful financial crisis that required an International Monetary Fund bailout programme. The government has ruled out another IMF bailout.
By cutting rates, the central bank has been responding to President Recep Tayyip Erdoğan’s orders to reduce borrowing costs for companies ans consumers. Erdoğan, who argues that higher interest rates are inflationary, has sacked three central bank governors in less than three years and has replaced nearly all of the members of its monetary policy committee since 2018.
In a speech on Tuesday, governor Şahap Kavcıoğlu did not mention the possibility of rate hikes to deal with inflation or the term “monetary policy” in laying out the bank’s future plans to fight inflation. Instead he preferred to talk about the bank’s so-called ‘lira-ization strategy’.
“We anticipate that the disinflationary process will begin with the re-establishment of the global peace environment and the elimination of base effects in inflation, together with the steps taken to establish sustainable price stability and financial stability,” Kavcıoğlu said. “In this context, we did not change the policy rate in the January-March 2022 period.”
Consumer price inflation is expected to accelerate further to 61.5 percent in March, according to the median estimate of 17 institutions in a Reuters poll published on Monday. Inflation may slow to 54 percent by the year-end, Reuters said. Estimates varied markedly between 32.3 percent and 75 percent. The February median forecast for year-end inflation was 38 percent.
JPMorgan Chase & Co. does not expect inflation to slow to less than 60 percent until the final month of this year, Reuters reported.
“This means that the real interest rate will be deeply in the red for a long time,” the U.S. investment bank said in a research note. “This not only makes it even more difficult to fight inflation, but also leaves the lira vulnerable.”
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