Turkey in danger of 'inflationary doom loop' as Erdogan defies laws of economics

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The Turkish lira is seemingly in freefall.

The currency has fallen by more than 40% this year against the US dollar and, following an 11% fall on Tuesday alone, now sits at close to a record low against the greenback.

100 Turkish lira is now worth around $8.15 or £6.10. Last November, 100 Turkish lira would have got you approximately $13 or £9.60.

The driver for this collapse is a peculiar attempt by the Turkish president, Recep Tayyip Erdogan, to subvert the laws of economics.

Orthodoxy is that, if inflation rises, monetary policy is tightened to bring demand more into kilter with supply.

Mr Erdogan contends that, to the contrary, high interest rates are a cause of higher inflation rather than a way of bringing it under control.

Accordingly, the president reacted with delight when on Thursday last week, the Central Bank of the Republic of Turkey (CBRT) cut its main policy rate from 16% to 15%.

It was the third time in as many months that it had cut its main policy rate – at a time when inflation in the country is running at 20%.

The move came a day after Mr Erdogan promised to release Turkey from the “scourge” of high interest rates. He has called those demanding higher interest rates in the country as “opportunists” and “global financial acrobats”.

Few now believe that the CBRT is independent to set monetary policy as it wishes. It is presently on its fifth governor this decade and its fourth since 2019, Mr Erdogan having sacked the previous incumbent, Naci Agbal, in March this year after he had the temerity to raise interest rates in an attempt to tackle inflation.