News Analysis: Türkiye's return to conventional economic policies requires time, efforts

by Burak Akinci

ANKARA, July 8 (Xinhua) -- For the first time in more than two years, Türkiye has hiked interest rates to combat stubborn inflation, a major source of the cost-of-living crisis in the country, but experts say restoring conventional economic policies requires time and efforts until the real effect can be seen.

On June 22, almost a month after President Recep Tayyip Erdogan won his reelection for a third term, his new investor-friendly economic team, headed by Finance and Treasury Minister Mehmet Simsek and Governor of the Central Bank Hafize Gaye Erkan, hiked the benchmark interest rate from 8.5 percent to 15 percent, reversing the president's unorthodox policy of cutting rates to fight inflation.

However, the market that had expected a far bigger tightening seemed not impressed at the 650-basis-point rate rise, leading to sharp falls of the Turkish lira to a series of record lows against the U.S. dollar. Another rate hike is widely expected at a new meeting of the central bank scheduled for July 20.

"There is no quick fix to Türkiye's economic problems. We have been experiencing these problems for three or four years and there's been no improvement," Baki Demirel, a professor of economics at Yalova University, told Xinhua.

In Demirel's view, the radical monetary tightening measures, such as hiking rates to 30-40 percent, may disrupt the economy even further, causing the collapse of small and medium-sized companies and massive unemployment.

Commenting on the negative impact of the lira slump on Turks' purchasing power, he suggested the government regulate markets to prevent excessive price hikes, noting what Türkiye needs most is a fairer distribution of wealth.

The exchange rate of Turkish lira has plunged from 7.5 per dollar in 2020 to more than 26 at present.

According to official data published on Wednesday, Türkiye's annual inflation rate eased to 38.2 percent in June, down from a 24-year high of 85.5 percent in October last year, but the prices of housing, commodities and food are still soaring.

"The decrease in inflation will take time," said Enver Erkan, chief economist at Istanbul's Dinamik Investment Securities, adding Türkiye should work to increase exports and attract foreign direct investments to achieve economic stability.

To alleviate the household burden, the Turkish government announced in late June a 34-percent increase in the country's monthly minimum wage to 11,402 liras (438 U.S. dollars).

On the other hand, the government plans to raise taxes on banks and corporations and issue a one-off additional motor vehicle tax in the face of the huge financial burden from the devastating earthquakes in February.

Guven Sak, the founding executive director of the Ankara-based Economic Policy Research Foundation of Türkiye, highlighted a need for reforms and belt-tightening to restore confidence in the Turkish economy.

"Türkiye had been doing irrational things in the economy for a while, then decided to return to the path of reason. Once you leave your mind's path, it is not easy to get out of the decisions from that period at once," Sak said in an article in the Turkish online daily Ekonomim.