Inflation hits nearly two-year high, Turkish lira falls

Turkish Lira and U.S. Dollars

Sulkaboglu | NurPhoto from Getty Images

Turkish lira Due to rising inflation concerns, the market lacked confidence in Turkish President Recep Tayyip Erdogan’s promise that the country’s worst economic turmoil had passed and fell again overnight.

The inflation rate in this country with a population of 84 million reached a 19-year high of 36.1% in December, the highest level during Erdogan’s presidency. Economists warned that due to Erdogan’s unorthodox interest rate cut and refusal to raise interest rates, the standard tool used by monetary policymakers to cool rising costs and strengthen the local currency, it could still rise.

Lira is trading at 13.44 Dollar At 9:45 am on Wednesday morning in Istanbul, since the beginning of 2021 (this is the worst year in 20 years), the U.S. dollar has depreciated by about 45% against the U.S. dollar. After that, it has faced a difficult start to the new year.

Erdogan last month Revealed a new rescue plan Boosting the currency without raising interest rates essentially requires protecting local depositors from market fluctuations. If the lira falls against hard currency more than the bank interest rate, the difference will be paid to them. Critics say that this plan is unsustainable and will further deplete Turkey’s already low foreign exchange reserves, which is essentially a large-scale hidden interest rate hike.

“We have seen time and time again, especially in emerging markets where foreign investors sell currency and local investors sell currency when they think the interest rate policy is a bit weird,” said Christopher, chief economist of Dubai-based Peninsula Real Estate. · Payne (Christopher Payne) said. The real estate management company told CNBC on Tuesday. “The result of currency collapse is inflation. And there is really no way to avoid this.”

Consumer goods prices are skyrocketing

According to statistics from the Turkish Statistics Agency, food and beverage prices in Turkey rose 44% year-on-year, and consumer prices rose 13.58% in December alone. Some economists predict that if Turkey’s monetary policy-seen as a severe lack of independence and controlled by Erdogan-does not reverse, the inflation rate will reach as high as 50% by the end of the first quarter of 2022. Goldman Sachs predicts that it will exceed 40% for most of the next year.

At the same time, Erdogan said he felt “sad” about the sharp rise in inflation.

But the president continued to ignore concerns. He said in Ankara on Tuesday that the “excessive” price increase is the “thorns” and “pebbles” on Turkey’s path forward, and his government will get rid of the inflation “bubble”. Erdogan added that he is determined to make Turkey one of the top ten economies in the world. The country’s currency performed the worst among all emerging market currencies in 2021.