Mahfi Eğilmez warns: Is interest the cause and inflation the result?

Economist Mahfi Eğilmez explained in detail how Turkey moved from one crisis to another and why economic balances were disrupted. Drawing attention to the impact of interest rates on inflation, Eğilmez stated that inflation is a result and cannot be controlled solely through interest rate policy.

President Recep Tayyip Erdoğan, in his statements regarding the economy, defended the interest rate reduction policy by using the phrase, "Interest is the cause, inflation is the result." Stating that he would not walk the same path as those who advocate for lowering interest rates, Erdoğan initiated the interest rate reduction process on September 3, 2021, based on the principle of 'Nas' (religious decree).

The Central Bank gradually lowered the policy rate, which was at 19 percent in 2021, down to 8.5 percent. However, during this process, foreign exchange rates rose rapidly. The dollar saw 36.52 TL, and the Euro reached the 39.67 TL level. With Mehmet Şimşek taking office as the Minister of Treasury and Finance, interest rates began to be raised again, but the expected improvement in economic balances could not be achieved.

EĞİLMEZ: ''IF INTEREST RATES FALL, INFLATION RISES'' 

Economist Mahfi Eğilmez explained the relationship between interest rates and inflation once again in an article he wrote for T24. Eğilmez emphasized that when interest rates are lowered, inflation rises, and that interest rates must be increased to ensure price stability.

Evaluating the crises Turkey has experienced in the past, Eğilmez recalled that recovery was achieved through policies implemented after the 2001 economic crisis. He stated that Turkey overcame the economic crisis at that time thanks to IMF support, interest rate policies, the establishment of budget discipline, and banking reforms.

However, in the subsequent period, the weakening of relations with the European Union, the suspension of structural reforms, and the weakening of public administration with the transition to the presidential system in 2018 disrupted economic balances. The crisis deepened further when interest rates were lowered while inflation was rising in 2021.

THE ISSUE OF CURRENCY-PROTECTED DEPOSITS  

Eğilmez stated that as interest rates were lowered, citizens turned to foreign currency, and the Currency-Protected Deposit (KKM) system was introduced to prevent this situation. However, the burden of KKM on the economy gradually increased, and a large portion of public resources was transferred there.

In the middle of 2023, the economic management changed, and a new program was introduced. However, this program focused only on monetary policy and did not introduce any measures against waste in public spending. Eğilmez stated that economic problems will continue unless radical changes are made in fiscal policies.

DEAD CAT BOUNCE  

Stating that temporary increases in industrial production are called a "dead cat bounce," Eğilmez expressed that although there was a short-term recovery in industrial production at the end of 2024, it was not sustainable. He emphasized that the industry, which is dependent on foreign currency input, is struggling due to a lack of investment and high interest rates.

STRUCTURAL REFORM  

Mahfi Eğilmez said that for Turkey to emerge from the economic crisis, it must focus not only on interest rate policy but also on structural reforms. According to Eğilmez:

The rule of law and the separation of powers must be taken as a basis

Tax reform must be carried out

Public spending must be brought under control

The incentive system must be used correctly