The Turkish economy is facing such serious problems that raising interest rates will merely lead to new problems and complications, said economist Hayri Kozanoğlu on Thursday.
Kozanoğlu’s remarks come at a time when there are discussions about the possibility of the Central Bank raising the policy interest rate, following an overhaul of the Turkish economy administration after the May elections. The newly appointed finance minister and central bank governor are expected to follow mainstream economic policies, which were previously rejected by Erdoğan.
If Finance Minister Mehmet Şimşek’s policies are successful, Erdoğan will be considered to have succeeded as he sees himself as the boss of the economy, Kozanoğlu stated. However, Erdoğan has simultaneously maintained his previous views that “interest is the cause, inflation is the result”, and if Şimşek’s policies fail, he will be blamed and removed from his position.
While some argue for raising interest rates as a potential solution, Kozanoğlu believes that this alone will not resolve Turkey’s economic challenges. Instead, he warns that increasing interest rates could exacerbate the problems, potentially leading to stagflation characterised by a combination of high inflation and economic stagnation.
Expressing scepticism about the current austerity measures, Kozanoğlu raised concerns about their effectiveness in offering hope to ordinary citizens. He believes that labour-dependent individuals will not benefit from interest rate hikes and the policies implemented by Şimşek. Kozanoğlu sees no easy solution or vision to alleviate the current economic predicament and improve the standard of living for people, regardless of the involvement of Şimşek or Central Bank Governor Gaye Erkan.
He also criticised the existing policies, highlighting the disparities between the official inflation rate and the relatively low policy interest rate. Despite an estimated inflation rate of approximately 35-40 percent, the official figure remains at 8.5 percent. Kozanoğlu highlighted that attempts to manipulate the market and discourage foreign currency purchases have failed to maintain the exchange rate at desirable levels.
Following the elections, the exchange rate has surged to 23.5 Turkish lira per dollar and 25 Turkish lira per euro. Kozanoğlu warns that suppressed inflation will soon have a detrimental impact on the economy, leading to increased prices for goods and services.
