Turkey Inflation Soars, Lira Remains Worst Performer as Erdogan's Islamic Handling of Interest Rates Fails

Turkey's runaway inflation is worsening, making life harder for more than 80 million people. According to the Turkish Statistical Institute, inflation rose nearly 79 percent in June, which is the highest level the country has seen in nearly 25 years.

Amid spiraling concerns about the rampant inflation Turkish Economy Minister Nureddin Nebati promised the people that consumer prices will decline by December. In an effort to cushion the impact of soaring inflation Ankara substantially increased the minimum wage for the workers last week. This was the second time within the span of a year that the government raised the minimum wage.

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A man waves a Turkish flag in front of Ataturk Airport during an attempted coup in Istanbul Reuters

'Interest is Mother of all Evil'

However, economists doubt if these measures will yield results in tackling inflation, which started rising after President Recep Tayyip Erdogan pledged by an unorthodox interest rate policy dictated by Islamic tenets last year and forced the central bank to issue a series of interest rate cuts.

According to Erdogan, a hardline Islamist, interest rates are the "mother of all evil." The fast-paced drop in interest rates resulted in the plummeting of Turkish lira, which eventually started eating away the purchasing power of the people.

No Free Hand for Turkish Central Bank

The Turkish central bank has had negligible freedoms in setting the monetary policy in the recent years, and Erdogan has been able to arm-twist it into adopting ultra dovish monetary policy. Borrowing rates were repeatedly slashed between 2020 and 2021, even though inflation continued rising. Turkey fired central bank officials who questioned the ultra loose monetary policy.

Turkish Lira
Turkish Lira Wikimedia Commons

The country's interest rate was gradually reduced to 14 percent last fall and has remained unchanged since. The Turkish lira is among the worst performing currencies in the world this year. So far this year it fell 27.6 percent, owing to rising inflation and the loose monetary policy.

Lira's Free Fall

The lira had fallen 44 percent against the dollar last year, as the low rates regime took hold. The lira's nosedive started in December 2021 when Erdogan said on state television that he was against raising interest rates owing to Islamic tenets.

Setting economic priorities aside, Erdogan said he would demand the central bank to keep interest rates low. "As a Muslim, I will continue doing what our religion tells us. This is the command," Erdogan said, according to DW.

Erdogan's Alternative Plan

Instead of tightening policy to reduce inflation and firm up lira, Erdogan and his allies argue that lower interest rates will boost Turkish exports, investment and jobs. He has been promoting a new economic plan prioritizing economic growth, credit, production and exports, despite widespread criticism of the policy from economists and opposition politicians.

However, more than a year into the new experiment, Turkey's inflation worries persist. According to the Turkish Statistical Institute, while prices of food and non-alcoholic beverage climbed 93.9 percent last month, transportation prices jumped 123.37 percent from the previous year.

Lira Among Worst Performing Currencies

On Monday, Turkish lira fell to 16.82 against the US dollar following the inflation data. "It's very hard to see any light at the end of the tunnel for the Turkish lira ... In an environment where the global liquidity wave is turning, it is rarely a favourable environment for a currency where you have this very shaky and non-credible policy mix," Witold Bahrke, strategist at Nordea Asset Management, told Reuters.