One year of Turkey’s unorthodox easing cycle

(Repeat the September 9 article with no changes to the text)

By Canan Sevgili

GDANSK, Sept 9 (Reuters) – Nearly 12 months ago, Turkey’s central bank embarked on a rate-cutting cycle amid rising inflation, defying traditional monetary policy and bucking a global trend of rising borrowing costs.

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

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

Below are five charts showing the impact of monetary easing and the subsequent lira crash:


The cocktail of a weakening currency and rising inflation has long plagued Turkey – and cutting interest rates in the face of rising inflation has brought back ghosts of the past.

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The Turkish lira 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 the period. Since the beginning of the year, it has vied with the Argentine peso and the Ukrainian hryvnia for the worst-performing EM currency.


Pandemic shutdowns had already fueled inflation, and this was exacerbated by the Russian invasion of Ukraine, which drove up energy and food prices.

This is especially felt in countries like Turkey, which imports many grains and other foods, often from Russia.

In August, inflation in Turkey’s key segment of food and non-alcoholic beverages rose by 90.25%, while annual headline inflation hit a new 24-year high of 80.21%, up from 19.25% in August last year.

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Turkey imports almost all of its energy needs, making its trade balance and import-related inflation rate very sensitive to oil prices.

Brent crude futures are up nearly a quarter since last September, but that’s up 170% when oil prices are calculated in Turkish liras — well above the hit other emerging markets have absorbed.

High oil prices are also weighing on Turkey’s current account and potentially increasing pressure on the lira.

trading problems

As part of an economic program presented last year, Turkey wants to achieve a current account surplus through stronger exports, tourism income and low interest rates. But that goal is slipping further and further away due to rising global energy and commodity prices.

Data showed that Turkey’s foreign trade deficit rose nearly 150% year on year to $10.7 billion in July, data from Turkey’s Statistics Institute showed.

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Preliminary August data confirmed that trend, Goldman Sachs said, showing that the trade deficit had widened again to $11.3 billion, compared with $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 insurance on Turkey’s debt has risen sharply over the past 12 months as broader global market woes and risk aversion heightened concerns about Turkey’s high inflation, falling currency and deeply negative real interest rate.

The country’s five-year credit default swaps (CDS) have more than doubled to 742 basis points (bps) since Sept. 1, 2021, data from S&P Global Market Intelligence shows.

(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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