AT at least by Compared to last year’s crash, when it fell 44% against the dollar, the Turkish lira ran well late. The currency has lost only 4% of its dollar value since January. Part of the reason is a scheme to protect lira deposits against exchange rate changes, which the government launched in December and which has suppressed demand for hard currency. Another reason is a series of interventions by the Turkish central bank in the currency market. The latest of these came on February 22, when the bank sold nearly $ 1 billion in foreign reserves, which helped the currency absorb some shock waves since the Russian invasion of Ukraine.
Lira could recover her foot. But here is where the rise in inflation started last year due to the fall of the currency. Officially reported inflation rose to 48.7% a year in January. Forecasts are seen at the top of the rate in spring and above 30% year round, mainly thanks to key effects. Rising electricity prices, as well as widespread fears that the government is massaging inflation data, have sparked protests in some parts of the country. Turkey’s main opposition leader has announced that he will not pay his electricity bill unless the government of President Recep Tayyip Erdogan withdraws the recent price hike.
Unfortunately for the Turks, who are rapidly becoming accustomed to stockpiling non-perishable and basic necessities, stabilizing the exchange rate will not be enough to control inflation. Rising wages (Turkey has recently raised the minimum wage by 50%), strong retail demand and continued rise in energy and commodity prices have forced inflation to remain high.
The biggest problem is Turkey’s insistence on keeping interest rates low. After a series of cuts last year, the central bank’s benchmark rate is 14%, 35 percentage points lower than the inflation rate. Selva Demiralop, a professor of economics at Coke University in Istanbul, says that under the line, Turks may question the wisdom of keeping their money in the bank, while the interest on their deposits, even protected from the shock of the currency, is much lower than inflation. Instead, consumers may decide to spend for sustainable or property, fueling price increases.
With Orthodox monetary policy settings, it is difficult to keep inflation in check. (Ask Brazil, where inflation is in double digits despite many interest rate hikes.) This is impossible with Turkey. This will not change soon. Overwhelmed by growth and mistakenly believing that the only way to tackle inflation is to reduce rates, Mr Erdogan has vowed to borrow cheaply. “We cannot sacrifice the growth rate,” admitted ruling party lawmaker Sevdet Ilmaz.
This does not mean that hyperinflation is on the card. Gisem Oztok Altinsak, chief economist at Tusiya, the country’s largest trading firm, said the kind of price hikes Turkey expects next month will reduce demand. This creates a buffer that prevents inflation from reaching three figures, he says. But due to persistent structural problems, and the central bank’s credibility being shattered, it will probably take years to bring it down to single digits or even below 20%. 3
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This article is published in the Finance and Economics section of the print edition, entitled “Sticking”