Turkish lira falls as inflation hits nearly two-decade high

Turkish lira and U.S. dollar

Resul Kaboglu | NurPhoto via Getty Images

Turkey’s lira tumbled again overnight over rising inflation fears, with markets showing little faith in President Recep Tayyip Erdogan’s promises that the worst of the country’s economic turmoil is over.

Inflation in the country of 84 million hit a 19-year high of 36.1% for December, the highest in all of Erdogan’s tenure as president. And economists warn it could still go up, thanks to Erdogan’s unorthodox policy of cutting and refusing to raise interest rates, a standard tool used by monetary policymakers to cool down rising costs and strengthen local currencies.

The lira was trading at 13.36 to the dollar on Wednesday morning at 11 a.m. in Istanbul, already facing a rocky start to the new year after having lost about 45% of its value against the greenback since the start of 2021, which was its worst year in two decades.

Erdogan last month revealed a new rescue plan to bolster the currency without raising rates, which essentially entails protecting local depositors against market volatility by paying them the difference if the lira’s decline against hard currencies surpass banks’ interest rates. Critics say this plan is unsustainable, will further deplete Turkey’s already low FX reserves, and is essentially one large hidden interest rate hike.

“We’ve seen time and time again, particularly in emerging markets — foreign investors sell the currency, local investors sell the currency when they think interest rate policy has gone a bit wacky,” Christopher Payne, chief economist at Dubai-based Peninsula Real Estate Management, told CNBC on Tuesday. “The result of a collapsing currency is inflation. And there’s really no way to escape that.”

Consumer goods prices soaring

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