Inflation is Soaring. No Wonder Turkey Balked on Rates

(Bloomberg Opinion) -- Purges and browbeating haven’t delivered Recep Tayyip Erdogan the economic results he craves: Low levels of interest rates and inflation. They have eluded the Turkish leader despite heavy-handedness toward monetary appointees. If he gives his current team some space, progress might be possible. Merely tossing out a central bank chief doesn’t get you a swift change of policy. That’s one of the big surprises, and lessons, of this saga in an important emerging market.  

The president’s preferences are clear. Heads rolled at the central bank earlier this year after policy was tightened to fight an inflationary spiral. The prevailing view was that a quick reversal of at least a portion of the rate hikes that peeved Erdogan was sure to follow, after hawkish governor Naci Agbal was fired in March. (I shared that view.) We are still waiting. No cut has been forthcoming. That the volte face hasn't happened raises questions about whether switches in personnel can deliver radical change regardless of economic circumstances. Too much emphasis tends to be placed on the people who run organizations, not enough on the situation they are supposed to manage.

Months after the eviction, followed by shifts in key roles below the rank of governor, the Central Bank of the Republic of Turkey isn't bending to Erdogan’s will. The bank kept the benchmark rate at 19% on Thursday and pledged to pursue price stability. “The policy rate will continue to be determined at a level above inflation to maintain a strong disinflationary effect until strong indicators point to a permanent fall in inflation and the medium-term 5 percent target is reached,” the bank said in a statement. 

Galloping inflation makes a cave-in now dangerous for the lira, one of the worst-performing emerging market currencies this year. Persistently defying the president isn’t an appealing career move for officials, either. The country risks a half-way house, with rates neither high enough to decisively quash price increases nor low enough to satisfy Erdogan.

The latest decision came after figures showed inflation picked up to 18.95% in July from a year earlier, a whisker away from the official price of money. If the goal is to wring inflation from the system, then there's a strong case for a more muscular stance. That would put Governor Sahap Kavcioglu on a collision course with the man who appointed him to succeed Agbal.

Why wouldn’t Erdogan want lower inflation? His popularity, and that of the ruling party, is languishing. Economic travails — unemployment is also high — are only part of the problem: A flailing response to the wildfires that have ripped through Turkey’s Mediterranean coast is also eroding support for the government.

Erdogan has long held to the unorthodox view that high interest rates cause, rather than combat, inflation. He was at it again last week. “It is not possible for inflation to accelerate further from now on, because we’re transiting to lower interest rates,” Erdogan told AHaber television in an interview. “I guess I am giving this signal to somewhere,” he added, without specifying. His friendly neighborhood central banker was the likely recipient.  

Turkey’s economy isn’t all bad news. Like many, it’s enjoying a growth pop after last year’s slump. Gross domestic product grew 7% in the first quarter from a year earlier, better than any Group of 20 nation other than China. Pent-up demand after the deep global downturn, coupled with massive stimulus from major powers, especially the U.S., is boosting a lot of countries. Even when it comes to inflation, things might not be quite as dire as current numbers suggest. The central bank, in recent projections, sees the pace of price increases abating a bit toward the end of the year. That gives Kavcioglu some scope to hint cuts might be possible after all. 

He’ll be going in a different direction from the Federal Reserve, Bank of England and counterparts in Canada, New Zealand and Australia that are inching toward withdrawing accommodation or have begun to do so. That will suit Kavcioglu just fine, if he lasts.  Economic conditions made for a more complicated task than Kavcioglu might have imagined when he was a columnist taking potshots at Agbal that impressed the president. Not so simple, and not so new. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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