Turkish Lira Under Pressure Again because of Soaring Inflation

The figure, resembling obscure remote currencies’ ordeals in their unhappy past, marks an unprecedented case in the country’s over 20-year history. Turkey has been recording double-digit inflation since early 2017, but the latest reading is the highest since the ruling Justice and Development Party (AKP) came to power in 2002. Although the Turkish currency looks more or less stable following the latest inflation data, trading at 14.7 lira (USDTRY) against the dollar and 16.2 lira against euro (EURTRY), it has depreciated against USD by a whopping 44% since September 2021 and more than 11% since the start of January. Although, technically speaking, TRY is holding remarkably well to its current levels, nothing indicates it can cure itself and fight back at least, say, a quarter of its substantial annual drawdown.

The largest jump in prices was recorded in transportation, with prices skyrocketing 105.86% YoY, followed by food and non-alcoholic beverages, up 89.10%. The smallest inflation rate was observed in communication at 18.71%. The collapse of the lira has pushed up the cost of energy imports, and foreign investors are now turning away from the once-promising emerging market.

Turkish President Recep Tayyip Erdoğan, as many conventional Fx analysts and reporters say, flying in the face of economic orthodoxy, insists that sharp cuts in interest rates have been needed to bring down soaring consumer prices. In April, the Central bank kept its benchmark interest rate steady for the fourth consecutive month, seemingly discarding high inflation.

In the past year, after several consecutive interest rate cuts by the Turkish Central Bank, the depreciation of the national currency accelerated sharply, which negatively affected the country's financial system, and annual inflation accelerated to 36% aggravating already elevated fluctuations in the lira exchange rate. But in 2022 the story kept revolving, and the lira kept gradually weakening, although at a slower pace: thus, at the end of January the USDTRY exchange rate was about 13.5, but one month later it was already at around 14, at the end of March – 14.5, and by the end of April – 14.8.

At the same time, the collapse of the Turkish lira on November 23 by 18% was the steepest in the last 20 years. The dollar exchange rate reached a record 18.4 lira on December 20, while in January last year it was worth 7.4 lira. A number of prominent economists worried that such an adverse scenario could trigger a sharp jump in unemployment in Turkey, further aggravating its economic prospects and investment outlook. However, after statements by Turkish President Erdoğan about measures to counter the volatility of the exchange rate, the lira somewhat rebounded at the end of December. Erdoğan also stated that the problem of high prices and inflation in the country “will be resolved as soon as possible”. Turkey has cut taxes on some staples and offered subsidies for some electricity bills for vulnerable households, but even this has failed to stem inflation. Erdoğan’s government has responded by using state banks to buy up liras in a bid to cut the currency’s losses. Also, there is also speculation that the Central bank quietly sells dollars to stem the lira’s slide through back channels. The saga to be continued.