London Daily

Focus on the big picture.
Saturday, May 31, 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
Satirical Sketch Sparks Political Spouse Feud in South Korea
Indonesia Quarry Collapse Leaves Multiple Dead and Missing
South Korean Election Video Pulled Amid Misogyny Outcry
Asian Economies Shift Away from US Dollar Amid Trade Tensions
Netflix Investigates Allegations of On-Set Mistreatment in K-Drama Production
US Defence Chief Reaffirms Strong Ties with Singapore Amid Regional Tensions
Vietnam Faces Strategic Dilemma Over China's Mekong River Projects
Malaysia's First AI Preacher Sparks Debate on Islamic Principles
White House Press Secretary Criticizes Harvard Funding, Advocates for Vocational Training
France to Implement Nationwide Smoking Ban in Outdoor Spaces Frequented by Children
Meta and Anduril Collaborate on AI-Driven Military Augmented Reality Systems
Russia's Fossil Fuel Revenues Approach €900 Billion Since Ukraine Invasion
U.S. Justice Department Reduces American Bar Association's Role in Judicial Nominations
U.S. Department of Energy Unveils 'Doudna' Supercomputer to Advance AI Research
U.S. SEC Dismisses Lawsuit Against Binance Amid Regulatory Shift
Alcohol Industry Faces Increased Scrutiny Amid Health Concerns
Italy Faces Population Decline Amid Youth Emigration
U.S. Goods Imports Plunge Nearly 20% Amid Tariff Disruptions
OpenAI Faces Competition from Cheaper AI Rivals
Foreign Tax Provision in U.S. Budget Bill Alarms Investors
Trump Accuses China of Violating Trade Agreement
Gerry Adams Wins Libel Case Against BBC
Russia Accuses Serbia of Supplying Arms to Ukraine
EU Central Bank Pushes to Replace US Dollar with Euro as World’s Main Currency
Chinese Woman Dies After Being Forced to Visit Bank Despite Critical Illness
President Trump Grants Full Pardons to Reality TV Stars Todd and Julie Chrisley
Texas Enacts App Store Accountability Act Mandating Age Verification
U.S. Health Secretary Ends Select COVID-19 Vaccine Recommendations
Vatican Calls for Sustainable Tourism in 2025 Message
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
Trump Threatens 25% Tariff on iPhones Amid Dispute with Apple CEO
Putin's Helicopter Reportedly Targeted by Ukrainian Drones
Liverpool Car Ramming Incident Leaves Multiple Injured
Australia Faces Immigration Debate Following Labor Party Victory
Iranian Revolutionary Guard Founder Warns Against Trusting Regime in Nuclear Talks
Macron Dismisses Viral Video of Wife's Gesture as Playful Banter
Cleveland Clinic Study Questions Effectiveness of Recent Flu Vaccine
Netanyahu Accuses Starmer of Siding with Hamas
Junior Doctors Threaten Strike Over 4% Pay Offer
Labour MPs Urge Chancellor to Tax Wealthy Over Cutting Welfare
Publication of UK Child Poverty Strategy Delayed Until Autumn
France Detains UK Fishing Vessel Amid Post-Brexit Tensions
Calls Grow to Resume Syrian Asylum Claims in UK
Nigel Farage Pledges to Reinstate Winter Fuel Payments
Boris and Carrie Johnson Welcome Daughter Poppy
×