Don’t Expect a Big Rate Hike.
The rise in VAT rates and SCT on fuel products seem to have marked the last week in Turkey. Although the economy Minister is new, their narrative remains old:
“Nevertheless, fuel prices in Turkey are cheap compared to Europe.”
Well, we should not be surprised by this statement, which is utterly illogical in terms of economics, since, as you may remember, Minister Şimşek had referred to tax increases as “an update, not a hike” when he had been serving as the Minister of Finance. So, quite apparently, the Government is trying to increase its revenue, rather than fighting inflation, just like they did in the previous term.
Our government should have learned these two facts by now:
Trying to keep exchange rates under control while economy is struggling with structural problems causes a huge deterioration in pricing behaviour as well sharp rises in exchange rates and inflation.
Raising taxes under these circumstances will lead nothing but to even higher inflation.
Although taxes are not taken into account in inflation calculations, July inflation rate may hit a record high level due to the domino effect of price hikes. It looks like the CBRT will have a hard time making this month’s interest rate decision. If they push interest rates too high, growth will be in danger.
It should be noted that attempting to reduce inflation by increasing both interest rates and taxes would result in higher cost of living. While, on the one hand, the Government keeps raising wages to keep demand alive, on the other hand, the Central Bank buys foreign currency in order to replenish its reserves. Different actions with different aims.
So, this supposedly unflawed strategy of the Government gives the impression that, in fact, inflation is not seen as the priority enemy. What the Government really does is to collect more and more taxes while wages are playing catch-up with inflation. As the Government tries to please rentiers with the KKM scheme, until the local elections, we are living a worse version of everything that happened before the last elections.
Given the situation, I expect another change in the economy administration before the local elections. Because these nonsensical economic policies are likely to create a political risk, somebody will definitely get the axe for it.
As for the next interest rate, I do not expect it to exceed 20%, at the most, and I even doubt that.