Bearing the Scars: A Year of Unorthodox Easing Cycle in Turkey


Almost 12 months ago, Turkey’s central bank embarked on a rate-cutting cycle in the face of soaring inflation, defying traditional monetary policy and bucking a global trend to rising borrowing costs.

On September 23, 2021, policymakers began to cut the policy rate significantly, then to 19%. It now stands at 13% after the bank made another surprise cut in August – despite monetary easing which helped push inflation above 80%.

President Tayyip Erdogan has encouraged this unorthodox policy in hopes of providing targeted cheap credit to boost exports and economic growth with the aim of creating a current account surplus.

Below are five charts showing the effects of monetary easing and the ensuing lira crash:


The cocktail of a weaker currency and rising inflation has long haunted Turkey – and lower rates in the face of soaring inflation have brought back the ghosts of the past.

The Turkish lira TRY= has fallen 54% against the dollar since the central bank began its easing cycle last September, making it the worst performing emerging market (EM) currency over this period. It also vies for the worst-performing emerging market currency with the Argentine peso ARS= and Ukrainian hryvnia UAH= year-to-date.


Pandemic-related shutdowns had already fueled inflation, and this was exacerbated by Russia’s invasion of Ukraine which drove up energy and food prices.

This has been strongly felt in countries like Turkey, which imports many grains and other foodstuffs, often from Russia.

In August, inflation in Turkey’s key food and non-alcoholic beverage segment soared 90.25%, while headline annual inflation hit a new 24-year high of 80.21%, compared to 19.25% in August last year.


Turkey imports almost all of its energy needs, so its trade balance and the rate of inflation linked to imports are very sensitive to oil prices.

Brent futures are up nearly a quarter since last September, although that translates to a 170% jump when oil prices are calculated in Turkish lira – well above the blow than others emerging economies absorbed.

High oil prices are also weighing on Turkey’s current account balance, potentially adding further pressure on the lira.


Under an economic program unveiled last year, Turkey aims to move to a current account surplus through stronger exports, tourism revenue and low interest rates. But that goal keeps getting further away due to soaring global energy and commodity prices.

Data showed Turkey’s foreign trade deficit jumped nearly 150 percent year-on-year to $10.7 billion in July, according to data from the Turkish Statistical Institute.

Preliminary August data confirmed that trend, Goldman Sachs said, showing the trade deficit widened again to $11.3 billion from $4.3 billion in August last year. A global economic slowdown and an expected recession in Europe will do little to ease the pain going forward, analysts said.


The cost of insuring exposure to Turkish debt has risen sharply over the past 12 months as global market issues and risk aversion amplified concerns over Turkey’s high inflation, falling currency and the deeply negative real interest rate.

The country’s five-year credit default swaps (CDS) TRGV5YUSAC=MG have more than doubled to 742 basis points (bps) since September 1, 2021, according to data from S&P Global Market Intelligence.
Source: Reuters (Reporting by Canan Sevgili, Halilcan Soran and Azra Ceylan, additional reporting by Karin Strohecker; editing by Jonathan Spicer and Frank Jack Daniel)


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