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Turkish lira falls as inflation hits nearly two-decade high


Turkish lira, U.S. dollars

Resul Kaboglu via NurPhoto via Getty Images| NurPhoto via Getty Images

Turkey’s liraOver rising inflation worries, markets tumbled once more overnight. Markets have little faith in President Recep Takip Erdogan’s assurances that Turkey’s worst economic crisis is behind them.

For December 2018, the nation of 84million saw an inflation rate of 36.1%, a new record for Erdogan’s term as president. Economists are concerned that it will continue to rise due to Erdogan’s unconventional policy of cutting interest rates and refusing them to increase. This is a common tool for monetary policymakers in order to reduce rising costs and to strengthen local currencies.

At 13.44, the Lira traded. dollarOn Wednesday, at 9:45 AM in Istanbul, the Turkish currency lost 45% against the dollar since 2021. This was the worst year it has seen in over two decades.

Erdogan last month revealed a new rescue planTo bolster the currency, without increasing rates. This basically means that local depositors are protected against volatility in the market by paying the difference to them if the decline of the lira against hard currencies exceeds banks’ interest rates. Critics argue that this plan cannot be sustained, will deplete Turkey’s low FX reserves further, and is basically one hidden interest rate rise.

“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 is inflation. That’s the only way out.

Consumer goods prices soaring

According to the Turkish Statistical Institute, food and drink prices have increased by 44% over the past year. Consumer prices rose 13.58% just in December, an increase of 44%. Some economists predict inflation hitting as high as 50% by the end of the first quarter of 2022 if Turkey’s monetary policy — seen as direly lacking independence and controlled by Erdogan — is not reversed. Goldman Sachs predicts that it will rise to 40% by the end of this year.

Erdogan said that he is “saddened” by the sudden rise in inflation.

The president continued to dismiss concerns. He said on Tuesday that Turkey’s excessive price hikes are “thorns” and “pebbles” in his path and that his government will eliminate the inflation bubble. Erdogan stated that Turkey will be among the top 10 largest economies in the world. In 2021, the country’s currency was among the most deteriorating of emerging market currencies.