President Recep Tayyip Erdoğan on Monday said Türkiye would start to see a stronger positive effect of the government’s economic policy prioritizing low interest rates on inflation soon, as he reiterated the government’s aim to address the soaring cost of living.
The government has endorsed low interest rates to boost exports, production, investment and create new jobs as part of an economic program, eventually aimed at lowering inflation by flipping the country’s chronic current account deficit to a surplus.
"We will feel the positive effects of our low interest rate policy, which prioritizes production, employment and exports, on inflation more soon," Erdoğan told an event in Istanbul.
To counter the expected economic slowdown in the second half of this year, Türkiye’s central bank embarked on an easing cycle between August and November, slashing its policy rate by 500 basis points to 9%.
Price increases in Türkiye moderated in November, according to official data, signaling that inflation pressures that have been plaguing consumers for about a year and a half might be finally easing.
Annual inflation dropped below 85% last month after touching a 24-year high in October. It is expected to decline sharply as a result of the base effect at the end of the year and falling energy prices globally.
"We are solving the issue of the cost of living, which is the biggest source of distress in the whole world, including Europe and America, step by step," Erdoğan said.
Treasury and Finance Minister Nureddin Nebati on Monday said the decline in inflation will be seen due to the base effect that will last until the end of May next year, stressing that negative rates may be observed in food along with summer.
"The citizen does not look at the ‘base effect’ in inflation, but at his pocket. We will see a mathematical decline, but there will also be a decline that will be felt," Nebati told the Turkish business daily Nasıl bir Ekonomi.
Lira not far from ‘optimal point’
Nebati also addressed the recent remarks by exporters who complained that the Turkish lira was becoming increasingly overvalued and that foreign exchange rates should be directly proportional to inflation levels.
The lira’s current level is not "too far away from the optimal point" and further depreciation could fuel consumer inflation, he said.
"(Exporters) should not complain in vain about the exchange rate ... The increase in the foreign exchange will disrupt our inflation plan," the minister noted.
Turkish Exporters Assembly (TIM) chair Mustafa Gültepe last week said the stability in the lira, despite soaring inflation, is hurting exporters’ competitiveness and some risk losing markets. However, he did not propose a specific lira level.
Authorities have employed a battery of regulations to tightly control the exchange rate in the wake of a deep slide in the lira in late 2021, a year in which the Turkish currency lost 44% to the U.S. dollar. The currency dropped another 29% this year, but has stabilized since the summer and held steady near TL 18.6 since early October.
The earlier lira depreciation gave exporters of Turkish textiles, white goods and automobiles a big competitive edge globally. But since the central bank and government employed its reserves-management system, those benefits began to erode.
Current account gap at 2022 low
"2022 will go down in history as the worst year. There is a foreign trade deficit of $100 billion and a current account deficit of $50 billion, but thank God we are leaving this difficult period behind," Nebati said.
One of the main drivers of Türkiye’s economic growth this year, exports hit record-high volumes throughout the first 11 months of this year. Yet, a global slowdown has put a drag on foreign demand, notably among Türkiye’s largest trade partners, spearheaded by Europe.
Outbound shipments from January through November jumped 14% from a year ago to $231 billion, while imports were up 36.6% to nearly $331.1 billion, driven mainly by steep rises in energy and commodity prices after Russia’s invasion of Ukraine.
Separate data on Monday showed Türkiye posted the smallest current account deficit in a year, driven by robust tourism revenues.
The shortfall in the current account, the broadest measure of trade and investment, came in at $359 million in October, according to data from the central bank. The figure came in versus a revised $2.88 billion deficit in September.
Income from foreign tourists came in at $5.5 billion, the second-highest monthly inflow on record, according to central bank data going back nearly four decades. Official reserves rose $5.1 billion, the second biggest jump in 2022 after the $10.8 billion increase registered in August, after a Russian state company transferred funds to Türkiye for the construction of a nuclear power plant.
Bank accounts set up by Russian tourists are also contributing to the current buildup in Türkiye’s foreign currency holdings, Nebati said ahead of Monday’s data.