Economics (AS & A Level) · Feb / March 2022 · Paper 22 · Question 1

Aspects of Turkey’s macroeconomic performance and monetary policy Figs 1.1,1.2 and 1.3 show aspects of Turkey’s macroeconomic performance for the period August 2019 to April 2020. 4000 2000 Aug 2019 Oct 2019 Jan 2020 Apr 2020 0 –2000 –4000 –6000 2961 2870 3304 -1719 -1230 -5062 Source: tradingeconomics.com | Central Bank of the Republic of Turkey -4844 105 -2609 Fig. 1.1: Turkey Current Account Balance (US$m), August 2019 to April 2020 Aug 2019 Oct 2019 Jan 2020 Apr 2020 18 16 14 12 10 8 12.15 10.94 8.55 9.26 15.01 Source: tradingeconomics.com | Turkish Statistical Institute 11.86 10.56 11.84 12.37 Fig. 1.2: Turkey annual inflation rate (%) each month, August 2019 to April 2020 Aug 2019 Oct 2019 Jan 2020 Apr 2020 112 110 108 106 104 102 100 106.2 103.64 103.47 103.59 105.74 105.21 110.32 Source: tradingeconomics.com | Central Bank of the Republic of Turkey 106.77 104.56 Fig. 1.3: Turkey Terms of Trade, August 2019 to April 2020 3 Turkey’s central bank expected to cut interest rates for 10th time in a row Turkey’s central bank is expected to approve a further reduction in interest rates. Most economists predict that interest rates will fall. However, some wonder whether rates will continue to fall or whether the bank may soon need to raise them to reduce inflation. Turkey’s central bank has cut the interest rate from 24% in July 2019. It is now expected that the rate will be cut to 8%. Annual consumer price inflation was 8.6% in October 2019 and is now 11.4%, reducing the international competitiveness of Turkey’s goods and services. This means that if the rate of interest is cut to 8%, the real interest rate will be negative. The real interest rate in Turkey, calculated by subtracting annual inflation, is among the lowest in the world. It is negative at –3.4% compared with –0.6% in the Euro area and –0.3% in South Africa. The negative rate in Turkey discourages foreign investors from lending to the Turkish government, potentially affecting the value of Turkey’s currency, the lira. The currency fell to a record low of 7.3 per US dollar in early May, mainly due to concerns over the level of interest rates. Analysts differ over whether the expected interest rate cut will be the central bank’s last or whether it will continue to reduce borrowing costs. Some think it will generate inflation as the economy recovers from the impact of the COVID-19 pandemic. However, others are suggesting that the bank may continue to cut the interest rate because the Turkish government appears determined to do everything it can to speed up the economic recovery. Source: Ahval, 25 June 2020

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