Economist Daron Acemoğlu, known for nuanced analyses, warns that Turkey’s recent interest rate hike is just a first step in a series of stringent actions required to stabilise the country’s economy. The rise ”could signify a genuine commitment by the Central Bank to combating inflation, but whether it will be followed up is unclear,” he said.
Acemoğlu’s comments come amid the significant policy shift by the Central Bank of Turkey, which recently raised its interest rate from 17.5% to 25%. The move exceeded economists’ expectations and followed a series of rate hikes since the appointment of Hafize Gaye Erkan as governor in June. Since then, the bank has increased the policy rate by a staggering 1,650 basis points, aiming to control soaring inflation, which picked up to 47.8% in July.
The economist identified four key policy changes essential to Turkey’s economic recovery. First, he emphasised the need to increase real interest rates above zero to effectively control inflation, while expressing uncertainty about the role of state-owned banks in these anti-inflationary measures. “We are at the beginning of the first point. I am still not sure if state banks will stop?”
Second, Acemoğlu called for institutional reforms. “This process should start with the strengthening of freedom of expression and democratic rights,” he stated, going onto highlight the importance of structural reforms that would directly impact the economy.
Third, he stressed the need for foreign capital to improve the balance sheets of companies and banks. “This capital should also be used for large expenditure needs, such as those arising from natural disasters,” he explained.
Fourth, Acemoğlu underscored the importance of poverty alleviation. “Both investment and the social security net need to be strengthened,” he urged.
Despite these recommendations, Acemoğlu expressed scepticism about the government’s ability to implement these changes effectively. “I am not sure they will use these resources correctly,” he warned, casting doubt on the government’s management of foreign capital.
