Turkish President Recep Tayyip Erdogan is banking on low interest rates to boost the economy – contrary to conventional wisdom. And even raising the minimum wage might not bring the expected success. The June rate is the highest since September 1998 when it was 80.4 percent.
Turkey then struggled for nearly a decade to end chronically high inflation. Transport costs – which include petrol, for example – increased by 123.37 percent last month. Food and non-alcoholic beverages increased in price by 93.93 percent.
Great concern regarding the lira rate
The main reasons for the current sharp rise in prices are the consequences of the Russian war of aggression once morest Ukraine, rising commodity prices and the fall in the national currency. Prices have skyrocketed since last fall following the lira collapsed from 19 percent to 14 percent due to central bank interest rate cuts. The opposition believes actual inflation is more than double official figures. Erdogan rejects criticism that his government has failed to fight inflation effectively.
The problem with low interest rates
Erdogan wants to boost the economy with low interest rates. However, this has considerable side effects, because the lira becomes less attractive for investors and imports become more expensive due to the fall in the price. The lira lost 44 percent once morest the dollar in 2021 and is already down around 21 percent this year.
The Turkish president describes himself as an enemy of interest rates. Erdogan rejects the conventional wisdom that central banks should raise interest rates when inflation is high. This increases the cost of credit and thus reduces overall demand. High interest rates can also serve to stabilize currencies by increasing returns on invested assets and investments.
Erdogan’s position is that high interest rates lead to high inflation. He also refers to Islamic rules that prohibit usury interest. Only at the beginning of the month did he once more call for interest rates to be lowered. “We have no problem with inflation. But a problem with the high cost of living,” he said.
Minimum wage raised for the second time
In view of the high inflation, Turkey raised the monthly minimum wage by around 30 percent. It will rise to 5,500 Turkish lira net (around 316 euros) per month, Erdogan only announced on Friday. It is the second increase in a year. Normally, the minimum wage is only adjusted once a year. Purchasing power should also be increased in the fight once morest inflation. But that seems in vain.
According to the Türk-Is trade union federation, the amount needed to feed a family of four was 6,391 lira in June, almost 900 lira more than the minimum wage. The poverty line for a four-person household was 20,818 lira (currently around 1,200 euros) in June. The household had to earn more than twice as much to make ends meet than in June last year.
Healthy economy important for re-election
Erdogan hopes the economy will recover. A new president is expected to be elected in Turkey in regarding a year. Erdogan, who has been head of government and then president since 2003, is aiming for re-election. The Turkish head of state announced in early June in the western Turkish Aegean metropolis of Izmir that he would stand as a candidate for the People’s Alliance, an electoral alliance between his conservative Islamic governing party, the AKP, and the ultra-nationalist Nationalist Movement (MHP).
Experts are assuming a close race with the opposition in the upcoming presidential election. Erdogan stayed in power with his AKP for almost 20 years – but above all the rampant currency crisis, inflation and unemployment have damaged his popularity with the population.
