London Daily

Focus on the big picture.
Friday, Sep 04, 2026

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
UK Marks Merchant Navy Day With Tribute to Civilian Seafarers
Burnham Pays Tribute to Two Police Officers Killed on Duty in Northern England
Booking.com Left Fake Downing Street Listing Online for Two Months, Which Says
Burnham and Macron to Review UK-France Cooperation on Channel Crossings
UK Business Confidence Improves Slightly but Investment Concerns Persist
Burnham Faces Pressure Over Future North Sea Oil and Gas Licences
Burnham Pushes Wider English Devolution Through ‘Number Ten North’
British Chambers of Commerce Raises 2026 UK Growth Forecast to 1%
Keir Starmer Resigns as Holborn and St Pancras MP, Triggering By-Election
UK Chancellor Faces Tighter Budget Headroom as Long-Term Borrowing Costs Rise
UK Government Weighs Thames Water Nationalisation as Financial Crisis Deepens
Prime Minister Andy Burnham Faces First Commons Questions Over Tax and Spending Plans
Eleven British Seafarers Receive Merchant Navy Medal
Which? Creates Fake 10 Downing Street Rental Listing to Expose Booking.com Vetting Weaknesses
BP Appoints New Chairman in Effort to Stabilise Leadership
Aberdeen Sells Hydrogen Bus Fleet at Heavy Loss After Green Transport Experiment
UK Records Hottest Summer on Record as Climate Change Intensifies Extreme Heat
Scotland Pledges to End Temporary Accommodation for Children and Build 111,000 Affordable Homes
DNO Agrees $396 Million Deal to Acquire Capricorn Energy
Uber and Wayve Launch UK’s First Supervised Autonomous Ride-Hailing Service in London
Britain Expected to Avoid New US Tariffs Targeting European Union
Middle East Conflict Pushes UK Energy Costs Higher and Revives Inflation Concerns
UK Growth Forecast Cut to 1% Through 2027 as Youth Unemployment Is Projected to Rise
Andy Burnham Links Weak UK Growth to Brexit in First Full Commons Session as Prime Minister
Keir Starmer Resigns as MP, Triggering Holborn and St Pancras By-Election
UK Business Confidence Improves but Remains Deeply Negative
Aberdeen Hydrogen Bus Sale Recovers Just Six Pence for Every Pound Invested
Which? Exposes Booking.com Verification Failures With Fake 10 Downing Street Listing
British Business Bank Invests Up to £46 Million in Deep-Tech Startup Fund
Scottish Government Puts Violence Against Women at Center of Legislative Program
FCA Eases UK IPO Rules to Strengthen London’s Listing Market
UK Likely to Avoid Next US Tariff Measures as Washington Targets EU
Macron Visits UK for Bayeux Tapestry Exhibition and Border Security Talks
British Chambers of Commerce Cuts UK Growth Outlook to 1% for 2026 and 2027
Keir Starmer Resigns as MP for Holborn and St Pancras, Triggering By-Election
Prime Minister Andy Burnham Unveils Devolution and Cost-of-Living Agenda
UK Borrowing Costs Surge as 30-Year Gilt Yield Reaches 5.88%
Cleveland Police Receive £2 Million to Tackle Serious Crime in Middlesbrough
Number of Young People in England Without a Close Friend Reaches Record Level
Five Arrested After Newborn Baby Dies From Stab Wounds in Sheffield
Nigel Farage Faces Questions Over Reported Second Parliamentary Standards Investigation
UK Retirement Funding Requirement Rises by £64,000 Compared With 2021
UK House Prices Rise for First Time Since April, Nationwide Says
FCA Chief Faces Allegations of Intimidating Consumer Group Over £9 Billion Car Loan Inquiry
Scottish Government Presses Ahead With Cap on Essential Food Prices
Burnham Government Moves to Overhaul Early Prison Release Scheme
UK Records Hottest Summer on Record in 2026, Met Office Says
UK Government Announces Major Reset of Diplomatic Policy Towards Israel
UK Pushes Back After Trump Reopens Falkland Islands Sovereignty Dispute
Keir Starmer Resigns as MP, Triggering Holborn and St Pancras By-Election
×