Turkish President Tayyip Erdogan has seen numerous leadership challenges during his 18 years in office, having served as the Prime Minister between 2003 and 2014 and President for the subsequent seven years.
However, the cost-of-living crisis that’s now prevalent in Turkey has proved to be both hard to suppress and potentially era defining, placing incredible pressure on households and the Turkish lira.
But how has the cost of living soared in Turkey, and what does the future hold for the besieged Turkish lira?
Inflation Through 2021 and its Impact on the Lira
Through 2021, Turkey’s annual inflation rate and cost of living soared to a 19-year high, bringing the nation’s wider economic detail into sharper context and establishing it as a key international talking point.
In December alone, prices soared beyond 36%, making the cost of food, transport and similar staples unaffordable for a large number of households.
While the usual monetary response would be to hike interest rates to help cool inflation, Erdogan and his government choose to go the other way, slashing the base interest rate and triggering the collapse of the Turkish lira as a result.
Make no mistake; this has helped to prioritise and fortify exports at the expense of economic stability, with the lira shedding a staggering 44% against the US dollar last year and a further 5% at the beginning of 2022.
The recent figures also curbed a small but incremental recovery that occurred towards the end of December, during which time the lira enjoyed robust gains against the greenback.
More specifically, it grew by as much as 40% in just two days of trading, after Erdogan pledged to compensate savers for the ongoing inflation that had eroded the value of bank deposits held in lira.
What Does the Future Hold for the Turkish Lira?
The issue here is that despite these significant price gains towards the end of Q4 2021, the Turkish supremo continued to push the central bank and advocate the nation’s base interest rate.
By rubber stamping a fourth interest rate in four months at the beginning of 2022, Erdogan has effectively contradicted his own pledges, undermining the value of the lira further and narrowing its trading range.
Such reckless cuts are likely to have a significant impact on forex trading, while also undermining any potential economic recovery in Turkey. Sure, exports will boom as a result of the measures, but they’ll do little to combat rising inflation and will continue to diminish consumer confidence across the board.
This makes for a seemingly bleak future of the lira and Turkish economy as a whole, with the current circumstances and chaos unlikely to be alleviated any time soon.
Of course, there remains a chink of light with regards to the government pledge to pay the difference between the value of savings in lira and equivalent dollar deposits, but this will mean little if inflation continues to soar and the value of the national currency depreciates.
