Is this how inflation will fall?
As far as I see it, the so-called “return to rational policies” actually involves trying to reduce inflation by stifling demand through high taxes and restricting loan growth. The Government might be able to reduce inflation eventually if it waits long enough to see the fruit of its efforts, which is restricting loan approvals while increasing loan costs, and constantly hiking prices and taxes. The problem is that this waiting can last forever.
The major dilemma is that President Erdogan increases salaries and wages, while the Treasury and Finance Departments raise taxes to get most of them back to the government. With higher taxes, goods and services become more expensive, however the CPI Index does not fully reflect the reality since tax rates are not taken into account when calculating prices. Meanwhile, banks are ordered to restrict loan approvals to prevent low-income individuals from consuming through the use of credit, in the midst of all this, the money supply continues to grow. This situation puts our economy on a thin line between recession and hyperinflation.
President Erdogan’s recent statements indicate yet another adjustment to salaries and wages. I must repeat, once again, this is absolutely not the way to bring inflation under control. At this rate, another sharp wave of inflation might hit Turkey very soon.
You don’t need to make in-depth analyses to see that something is horribly wrong about the Government’s economic policies. Apparently, Treasury and Finance and the Central Bank seem to think that it is more effective to put the patient under instead of breaking the fever. With its latest decision to increase the market interest rate rather than its policy rate, the CBRT has shown us that it is also capable of playing by politics’ rules. After a while, the sedatives won’t be enough and they will have to squeeze the patient’s throat. And as you know, the body temperature of a person who is short of breath tends to decrease after a while. However, this does not mean that the patient has recovered.