Turkey’s finance tsar has declared war on soaring inflation and called on the country’s businesses to cut prices. 

Finance minister Berat Albayrak Tuesday called on business to cut prices by 10 percent to counter runaway inflation. The Turkish lira has fallen some 40 percent this year, driving up the price of everything from food to fuel and sending inflation to 25 percent last month, its highest in 15 years. 

Analysts warn that this radical strategy could hurt an economy that is already struggling. 

“It’s unusual to announce an anti-inflationary package without a reference to monetary policy,” said senior economist Inan Demir of Nomura International.

Most nations use monetary policy to fight inflation by raising interest rates to cut domestic demand and strengthen the local currency.

“I would say there is a reason, economic theory, and past experience favor monetary policy because measures to control prices have serious side effects,” Demir said.

Since the failed coup in 2016, numerous companies have been seized by Turkish authorities after being accused of conspiring against the government.

‘War on inflation’

In launching his “war on inflation,” the finance minister attacked unnamed companies for “speculation, opportunism and stockpiling.” Police have raided businesses, accused of speculation and shops and supermarkets are now being checked for “price gouging.”

Turkish President Recep Tayyip Erdogan is weighing in, calling on consumers to report shops and businesses for excessive price hikes.

Political analyst, Atilla Yesilada of Global Source Partners, warns the government’s efforts to curtail inflation are more likely to hurt the economy than help it.

“Some people are obviously trying to benefit from the currency turmoil, but a lot of people simply have no idea how to price and cost things. This is why they are simply raising prices by as much as the exchange rate,” Yesilada said. “By trying to stop this kind of behavior, the government is simply making things worse because if people can’t price appropriately, they will stop producing or selling. I understand in some grocery stores, pharmacies and supermarkets there is a shortage of some essential goods.”

International investors 

Last month, the Turkish central bank won back some much need credibility by the international investment community by hiking interest rates by over 6 percent in a move to rein in inflation and defend the currency.

Analysts interpreted the rate hike as an essential step toward returning to economic stability and re-establishing the central bank’s independence.

A key factor cited by international investors for the weakness in the Turkish lira was Erdogan’s hostility toward interest rises and his apparent control over the central bank.

Analysts say the latest measure will likely unnerve investors again. However the Turkish lira only suffered a minimal fall following the controversial policy announcement.

“The most important agenda item for investors is the Pastor Brunson case, and any other news is overshadowed by the hearing Friday, which explains the short-lived sell-off,” said economist Demir.

An American citizen, Pastor Andrew Brunson, is on trial accused of terrorism in Turkey, charges Washington insist are baseless. U.S. President Donald Trump’s trade sanctions imposed on Turkey in August was, in part, retaliation for Ankara’s refusal to release Brunson. The sanctions resulted in the lira falling.

Brunson trial resumes

On Friday, Brunson’s trial resumes with growing expectation that he will be allowed to return to the United States. Such a move would lift the threat of further US sanctions. However, analysts warn about what will happen if Brunson is not released.

“If Brunson is not released, the markets will start to price in further sanctions by the U.S. And, as long as we don’t have much clarity on the U.S. sanctions, the market’s inclination will be to price in the more adverse scenario,” said analyst Demir.
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