The Turkish economic crisis that started in mid-2018 is continuing to deepen and it is clearly reflected in the depreciation of the lira and surging inflation within Turkey. On top of that, foreign reserves are quickly depleting, despite efforts by the Central Bank of Turkey to increase them.
Partially because Turkey does not have the foreign assets necessary to strengthen the lira, the USD has gained approximately +26% on the lira, while the euro has gained +19% from the start of the year.
A potentially stronger indicator of the crisis that Turkey is embroiled in is the inflation rate; energy prices are up 92% year-to-date, while food prices are up a dizzying 92% year-over-year. Only in May, the inflation rate was approximately 73.5%, the highest rate since 1998.
One of the reasons that the lira is struggling is President Erdogan’s insistence on enforcing an unorthodox economic policy. Namely, he professes to strongly believe that low interest rates can curb inflation, as he has stated publicly many times.
The prevalent economic theory claims the opposite - that high interest rates are an economic tool that can control inflation. Due to this belief, President Erdogan has pressured the Central Bank of Turkey and other economic authorities to keep the rates low and even cut them.
In a speech made on Monday, June 6, after a cabinet meeting, President Erdogan doubled down on his approach, while downplaying the inflation rate, and stressing other possible sources for the depreciation of the lira.
“A part of the (inflation) problem is that some citizens are insisting on keeping their savings in foreign currencies, the other part is the imported inputs due to increasing production,” Erdogan stated per Reuters.
“This government will not increase interest rates. On the contrary, we will continue lowering the rates,” he added.
He even shifted the focus to the Russia-Ukraine conflict as the source of economic policies not having the desired effect.
“If there were no clash in the region, people would have been able to feel the concrete benefits of our economic programme,” Erdogan said.
Immediately following the speech, the lira fell another 0.2%, the lowest since December. We will keep you updated as the situation progresses.
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