Arab Press

بالشعب و للشعب
Friday, Jun 20, 2025

Turkey in danger of 'inflationary doom loop' as Erdogan defies laws of economics

Turkey in danger of 'inflationary doom loop' as Erdogan defies laws of economics

Sky's Ian King explains what is behind the collapse in value of the Turkish lira and warns things may get worse for households in the country as the cost of living surges.

The Turkish lira is seemingly in freefall.

The currency has fallen by more than 40% this year against the US dollar and, following an 11% fall on Tuesday alone, now sits at close to a record low against the greenback.

100 Turkish lira is now worth around $8.15 or £6.10. Last November, 100 Turkish lira would have got you approximately $13 or £9.60.

The driver for this collapse is a peculiar attempt by the Turkish president, Recep Tayyip Erdogan, to subvert the laws of economics.

President Erdogan says there will be no turning back from his policy of cutting interest rates despite high inflation


Orthodoxy is that, if inflation rises, monetary policy is tightened to bring demand more into kilter with supply.

Mr Erdogan contends that, to the contrary, high interest rates are a cause of higher inflation rather than a way of bringing it under control.

Accordingly, the president reacted with delight when on Thursday last week, the Central Bank of the Republic of Turkey (CBRT) cut its main policy rate from 16% to 15%.

It was the third time in as many months that it had cut its main policy rate - at a time when inflation in the country is running at 20%.

The move came a day after Mr Erdogan promised to release Turkey from the "scourge" of high interest rates. He has called those demanding higher interest rates in the country as "opportunists" and "global financial acrobats".

Few now believe that the CBRT is independent to set monetary policy as it wishes. It is presently on its fifth governor this decade and its fourth since 2019, Mr Erdogan having sacked the previous incumbent, Naci Agbal, in March this year after he had the temerity to raise interest rates in an attempt to tackle inflation.

The lira has fallen by more than 40% versus the US dollar this year


His successor Sahap Kavcioglu, a former MP and business school professor, has appeared far more willing to do Mr Erdogan's bidding. That may be, perhaps, because he is a member of the president's ruling Justice and Development Party.

He met with Mr Erdogan following the sharp falls in the lira on Tuesday, after which, the CBRT issued a statement in which it said the sell-off in the currency was "unrealistic and completely detached" from economic fundamentals.

Simon MacAdam, senior global economist at the consultancy Capital Economics, said: "Given this backdrop and Erdogan's record at sacking disobedient central bank governors, hopes that the CBRT will allay investors' fears and put a floor under the lira by not cutting rates further (or even raising them) are evaporating.

"Sharp falls in the lira are likely to tighten Turkey's financial conditions and could eventually end up straining its debt-laden banks."

The danger is that Turkey now enters an inflationary doom loop, with the collapse of the country's currency sparking a fresh round of inflation, if not generating hyper-inflation.

There are already signs that the economy has moved into that stage. Many Turkish consumers seeking to buy electronic products online today - such items are seen as a possible store of value in inflationary times - were unable to do so amid signs that some retailers are now unwilling either to take the risk of accepting the lira. They included Apple's website in the country.

Meanwhile, with interest rates significantly below the rate of inflation, Turks have been seeking where possible to protect their spending power by offloading their holdings of their local currency in exchange for either the euro or the US dollar.

This has itself contributed to further downward pressure on the lira.

A man changes Turkish lira for US dollars and euros at a currency exchange shop, in Ankara.


One major question is the extent to which Mr Erdogan is prepared to see the lira fall. The president has been a big advocate in the past of running trade surpluses and the collapse in the lira is certainly making the price of Turkish exports more competitive. The value of Turkish exports surged by 20%, to $21bn, in October.

This may help pacify some business leaders. Hakan Bulgurlu, chief executive of Arcelik, the owner of brands such as Beko and Grundig and one of Europe's biggest manufacturers of household appliances, told Sky News last month that the company was benefiting from a weaker currency.

Yet that only works for businesses when all their costs, as well as their sales, are priced in a weakened currency. Turkey is heavily dependent on imports of raw materials and energy and therefore the decline in the lira is likely to bite business before long.

It is already biting consumers. The price of basic goods has been rising steadily, such as bread, which has risen by 25% in recent weeks. Bread accounts for around 2.5% of the inflationary basket on its own in Turkey and is therefore likely to contribute to a higher figure next month.

The Turkish inflation problem is raising household living costs.


Other essential goods, including postal services, fertiliser and fuel, are also likely to exert upward pressure in inflation. That is likely to chip away at Mr Erdogan's popularity and may in turn induce further populist policies.

While sympathetic to the plight of ordinary Turks, economists and market participants have a bigger concern, which is whether the collapse in the lira might spark a collapse in other emerging market currencies. This happened in 2018 when the likes of the South African rand, the Mexican peso and the Vietnamese dong found themselves in the crossfire.

Mr MacAdam argues this is not so much of a risk this time around because countries like South Africa do not have the same funding needs that they did three years ago and their currencies are not as over-valued.

The currency is in freefall


Meanwhile, although some European banks, such as ING of the Netherlands, BBVA of Spain and BNP Paribas of France, do have exposure to the country, their exposure is not what it was, while foreign investors are also less exposed to the Turkish stock market than was once the case. There are, though, still risks ahead.

As Mr MacAdam put it: "The way this would get uglier for the rest of the world is if President Erdogan were to hold his nerve for long enough and for the lira to fall far enough to endanger Turkey's banks.

"This could sour risk appetite enough to prompt currency falls in other emerging markets and provoke central banks, in turn, to further tighten monetary conditions."

It is not that bad yet - but it is possible to see how things might worsen.

But for many Turkish households, already grappling with surging inflation and a real terms fall in their living standards, things are already pretty dreadful.

Newsletter

Related Articles

Arab Press
0:00
0:00
Close
16 Billion Login Credentials Leaked in Unprecedented Cybersecurity Breach
Senate hearing on who was 'really running' Biden White House kicks off
G7 Leaders Fail to Reach Consensus on Key Global Issues
Mass exodus in Tehran as millions try to flee following Trump’s evacuation order
Iranian Military Officers Reportedly Seek Contact with Reza Pahlavi, Signal Intent to Defect
China's Iranian Oil Imports Face Disruption Amid Escalating Middle East Tensions
Trump Demands Iran's Unconditional Surrender Amid Escalating Conflict
Israeli Airstrike Targets Iranian State TV in Central Tehran
President Trump is leaving the G7 summit early and has ordered the National Security Council to the Situation Room
Netanyahu Signals Potential Regime Change in Iran
Analysts Warn Iran May Resort to Unconventional Warfare
Iranian Regime Faces Existential Threat Amid Conflict
Energy Infrastructure Becomes War Zone in Middle East
Iran Conducts Ballistic Missile Launches Amid Heightened Tensions with Israel
Iran Signals Openness to Nuclear Negotiations Amid Ongoing Regional Tensions
Shock Within Iran’s Leadership: Khamenei’s Failed Plan to Launch 1,000 Missiles Against Israel
UK Deploys Jets to Middle East Amid Rising Tensions
Exiled Iranian Prince Reza Pahlavi Urges Overthrow of Khamenei Regime
Wreck of $17 Billion San José Galleon Identified Off Colombia After 300 Years
Iran Launches Extensive Missile Attack on Israel Following Israeli Strikes on Nuclear Sites
Israel Issues Ultimatum to Iran Over Potential Retaliation and Nuclear Facilities
Coinbase CEO Warns Bitcoin Could Supplant US Dollar Amid Mounting National Debt
Trump to Iran: Make a Deal — Sign or Die
Operation "Like a Lion": Israel Strikes Iran in Unprecedented Offensive
Israel Launches 'Operation Rising Lion' Targeting Iranian Nuclear and Military Sites
Israeli Forces Intercept Gaza-Bound Aid Vessel Carrying Greta Thunberg
IMF Warns of Severe Global Trade War Impacts on Emerging Markets
Syria to Reconnect to Global Economy After 14 Years of Isolation
Saudi Arabia Faces Uncertainty Over Succession After Mohammed bin Salman
Israel Confirms Arming Gaza Clan to Counter Hamas Influence
Majority of French Voters View Macron's Presidency as a Failure
U.S. Reduces Military Presence in Syria
Trump Demands Iran End All Uranium Enrichment in Nuclear Talks
Iran Warns Europe Against Politicizing UN Nuclear Report
Businessman Mauled by Lion at Luxury Namibian Lodge
Paris Saint-Germain's Greatest Triumph Is Football’s Lowest Point
OPEC+ Agrees to Increase Oil Output for Third Consecutive Month
Turkey Detains Istanbul Officials Amid Anti-Corruption Crackdown
Meta and Anduril Collaborate on AI-Driven Military Augmented Reality Systems
EU Central Bank Pushes to Replace US Dollar with Euro as World’s Main Currency
European and Arab Ministers Convene in Madrid to Address Gaza Conflict
Head of Gaza Aid Group Resigns Amid Humanitarian Concerns
U.S. Health Secretary Ends Select COVID-19 Vaccine Recommendations
Trump Warns Putin Is 'Playing with Fire' Amid Escalating Ukraine Conflict
India and Pakistan Engage Trump-Linked Lobbyists to Influence U.S. Policy
U.S. Halts New Student Visa Interviews Amid Enhanced Security Measures
Trump Administration Cancels $100 Million in Federal Contracts with Harvard
SpaceX Starship Test Flight Ends in Failure, Mars Mission Timeline Uncertain
King Charles Affirms Canadian Sovereignty Amid U.S. Statehood Pressure
Iranian Revolutionary Guard Founder Warns Against Trusting Regime in Nuclear Talks
×