Erdogan under pressure amid lira crisis as inflation reaches 20 year high

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Inflation figures surpassed expectation for February with the consumer price index revealed to have risen by 54.4 percent year on year. February also marked a monthly rise of 4.8 percent in inflation. A large part of this increase was driven by rising food and non-alcoholic drink prices which expanded over eight percent month on month. As exporters of nearly a third of the world’s grain conflict between Ukraine and Russia is expected to further push up food prices with energy costs also set to weigh heavily on the Turkish economy.

Soaring energy prices globally have already been a key part of Turkey’s inflation problem with transportation costs rising 76 percent year on year.

In a briefing note Jason Tuvey, senior EM economist at Capital Economics wrote: “The spillover effects from the Russia-Ukraine crisis, including higher global commodity prices and potentially fresh supply chain disruptions, mean that the risks are skewed to the upside.

“Inflation will stay close to these high levels until the very final months of this year, but the central bank and, crucially president Erdogan seem to have no appetite for interest rate hikes.”

Indeed as the lira plummeted and inflation soared throughout 2021 the Turkish central bank actively lowered interest rates through several cuts.

President Erdogan has described himself as an “enemy of interest rates”, holding onto the unorthodox belief that they cause inflation and should be lowered to boost prosperity.

Most mainstream economics advocates the use of interest rates in controlling inflation with the Bank of England carrying out two hikes so far as inflation in the UK has risen.

Mr Erdogan’s description of interest rates as “the devil” and staunch opposition has left a difficult balancing act for the Turkish central bank though.

The Turkish President wields considerable influence over the bank which has gone through a rapid succession of governors in recent years.

More recently though it has held interest rates steady since the new year though, despite Mr Erdogan’s calls for cuts.

In an attempt to bring some stability to the lira the central bank has outlined a new system of guaranteeing deposits and paying savers the difference on any price changes between their liras and the dollar.

The scheme was aimed at dealing with widespread ‘dollarisation’ in Turkey as people convert the increasingly devalued lira into more stable currencies such as the dollar.

Although offering some initial stability the plans have been limited in their effectiveness with the lira resuming its decline throughout February.

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As escalation in Ukraine has unfolded it has plummeted further, falling from 0.072 against the dollar on Monday to 0.070 by Friday.

Muhammet Mercan, Chief Economist at ING Turkey, predicted: “Escalating geopolitical risks support views for further inflationary challenges and widening external imbalances for Turkey via agricultural products and energy, either with price effects or possible trade drags with these countries.”

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