Turkey will go to the polls again on May 28 for the second round of the presidential election. President Recep Tayyip Erdoğan received 49.5% of the votes in the first round, while opposition candidate Kemal Kılıçdaroğlu received 45%. Neither candidate received the required 50% of the votes to be elected in the first round.

Focusing on the different economic policies advocated by the People's Alliance and the Nation Alliance, to discuss the potential monetary policy development in Turkey after the second round of elections;

If President Recep Tayyip Erdoğan wins the election, the current low interest policy is expected to continue despite the high inflation rate of 43.7%. Erdogan has expressed his intention to maintain low interest rates and believes inflation will eventually slow down as a result. This approach, which aims to support economic growth, may raise concerns about the sustainability of such a policy in the long run, as it may not be possible to control inflation and exchange rates with low interest rates alone.

On the other hand, opposition promised to return to economic orthodoxy if Kemal Kılıçdaroğlu from the Nation Alliance wins the election. This will include gradually increasing interest rates over several months and a transition to a more orthodox economic policy. While this approach may help tighten economic conditions and contain inflation, it may also lead to limited demand and loss of economic momentum in the short run.

Turkey's Extremely Negative Real Interest Rates… Kaynak: Bloomberg Economics, Dinamik Yatırım

Both policy options have their own implications and challenges. The current economic approach prioritizes growth through economic support and an inflationary expansionary approach, while orthodox policy aims to address inflation and restore economic stability at the expense of short-term popularity and potential economic slowdown.

The outcome of the election and subsequent economic policies will have a significant impact on the exchange rate, reserves and inflation in Turkey. However, the exact distribution and assessment of these policies is difficult to predict given the important crossroads the country is facing. The course of the economy will depend on whether the government will continue with the current approach or choose to return to economic orthodoxy with implications for the future direction of the economy.

Kaynak Dinamik Yatırım-Enver Erkan