London Daily

Focus on the big picture.
Wednesday, Dec 17, 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

0:00
0:00
Close
Trump Files $10 Billion Defamation Lawsuit Against BBC as Broadcaster Pledges Legal Defence
UK Says U.S. Tech Deal Talks Still Active Despite Washington’s Suspension of Prosperity Pact
UK Mortgage Rules to Give Greater Flexibility to Borrowers With Irregular Incomes
UK Treasury Moves to Position Britain as Leading Global Hub for Crypto Firms
U.S. Freezes £31 Billion Tech Prosperity Deal With Britain Amid Trade Dispute
Prince Harry and Meghan’s Potential UK Return Gains New Momentum Amid Security Review and Royal Dialogue
Zelensky Opens High-Stakes Peace Talks in Berlin with Trump Envoy and European Leaders
Historical Reflections on Press Freedom Emerge Amid Debate Over Trump’s Media Policies
UK Boosts Protection for Jewish Communities After Sydney Hanukkah Attack
UK Government Declines to Comment After ICC Prosecutor Alleges Britain Threatened to Defund Court Over Israel Arrest Warrant
Apple Shutters All Retail Stores in the United Kingdom Under New National COVID-19 Lockdown
US–UK Technology Partnership Strains as Key Trade Disagreements Emerge
UK Police Confirm No Further Action Over Allegation That Andrew Asked Bodyguard to Investigate Virginia Giuffre
Giuffre Family Expresses Deep Disappointment as UK Police Decline New Inquiry Into Andrew Mountbatten-Windsor Claims
Transatlantic Trade Ambitions Hit a Snag as UK–US Deal Faces Emerging Challenges
Ex-ICC Prosecutor Alleges UK Threatened to Withdraw Funding Over Netanyahu Arrest Warrant Bid
UK Disciplinary Tribunal Clears Carter-Ruck Lawyer of Misconduct in OneCoin Case
‘Pink Ladies’ Emerge as Prominent Face of UK Anti-Immigration Protests
Nigel Farage Says Reform UK Has Become Britain’s Largest Party as Labour Membership Falls Sharply
Google DeepMind and UK Government Launch First Automated AI Lab to Accelerate Scientific Discovery
UK Economy Falters Ahead of Budget as Growth Contracts and Confidence Wanes
Australia Approves Increased Foreign Stake in Strategic Defence Shipbuilder
Former UK Prime Minister Boris Johnson proclaims, “For Ukraine, surrendering their land would be a nightmare.”
Microsoft Challenges £2.1 Billion UK Cloud Licensing Lawsuit at Competition Tribunal
Fake Doctor in Uttar Pradesh Accused of Killing Woman After Performing YouTube-Based Surgery
Hackers Are Hiding Malware in Open-Source Tools and IDE Extensions
Traveling to USA? Homeland Security moving toward requiring foreign travelers to share social media history
UK Officials Push Back at Trump Saying European Leaders ‘Talk Too Much’ About Ukraine
UK Warns of Escalating Cyber Assault Linked to Putin’s State-Backed Operations
UK Consumer Spending Falters in November as Households Hold Back Ahead of Budget
UK Orders Fresh Review of Prince Harry’s Security Status After Formal Request
U.S. Authorises Nvidia to Sell H200 AI Chips to China Under Security Controls
Trump in Direct Assault: European Leaders Are Weak, Immigration a Disaster. Russia Is Strong and Big — and Will Win
"App recommendation" or disguised advertisement? ChatGPT Premium users are furious
"The Great Filtering": Australia Blocks Hundreds of Thousands of Minors From Social Networks
Mark Zuckerberg Pulls Back From Metaverse After $70 Billion Loss as Meta Shifts Priorities to AI
Nvidia CEO Says U.S. Data-Center Builds Take Years while China ‘Builds a Hospital in a Weekend’
Indian Airports in Turmoil as IndiGo Cancels Over a Thousand Flights, Stranding Thousands
Hollywood Industry on Edge as Netflix Secures Near-$60 Bln Loan for Warner Bros Takeover
Drugs and Assassinations: The Connection Between the Italian Mafia and Football Ultras
Hollywood megadeal: Netflix acquires Warner Bros. Discovery for 83 billion dollars
The Disregard for a Europe ‘in Danger of Erasure,’ the Shift Toward Russia: Trump’s Strategic Policy Document
Two and a Half Weeks After the Major Outage: A Cloudflare Malfunction Brings Down Multiple Sites
UK data-regulator demands urgent clarity on racial bias in police facial-recognition systems
Labour Uses Biscuits to Explain UK Debt — MPs Lean Into Social Media to Reach New Audiences
German President Lays Wreath at Coventry as UK-Germany Reaffirm Unity Against Russia’s Threat
UK Inquiry Finds Putin ‘Morally Responsible’ for 2018 Novichok Death — London Imposes Broad Sanctions on GRU
India backs down on plan to mandate government “Sanchar Saathi” app on all smartphones
King Charles Welcomes German President Steinmeier to UK in First State Visit by Berlin in 27 Years
UK Plans Major Cutback to Jury Trials as Crown Court Backlog Nears 80,000
×