Inflation rises as Turkish lira falls against U.S. dollar

The fall of Turkish lira against the dollar causes a soaring inflation and escalating interest rates in the country
Monday, 06 August 2018 21:16

Turkey’s dependency on importation and external sources escalate the country’s fragility in terms of increasing exchange rates, as the Turkish lira witnesses a record low against the U.S. dollar amid the tensions between Washington and Ankara.

The Turkish lira tumbled to a record low against the dollar on Monday, following the tension between the U.S. and Turkey as the dollar reached up to 5,19 against the lira while the Euro exceeded 5,99, culminating in a loss of 2,5 percent against the lira.

The Turkish lira’s loss in value against the dollar has increased at the rate of 46 percent since the last year while it has witnessed a loss of 32 percent against the Euro.

A recent report by Turkey’s Central Bank regarding the developments on prices shows that “exchange-rate pass-through” has played a major role in escalating consumer and producer prices. Turkey’s dependency on importation in production and consumption causes the lira’s loss of value against the dollar and Euro to reflect on the prices.

SOARING INFLATION GRIPS ECONOMY

The producer prices have grown by 25 percent due to the escalation in oil prices and exchange rate pass-through in July 2018. The costs and prices rise as the dollar and the Euro peak because of the country’s dependency on importation on raw materials and intermediate goods in industry.

Since the growth of 25 percent does not include the recent increases in electricity and natural gas prices yet, it seems that the producer and consumer prices will further escalate after August 1 following the government-led increases. With the lira’s current free-fall against the exchange rates, the inflation in August will likely be around 18-20 percent in consumer prices and 28-30 in producer prices.

The downfall of the Turkish lira also increases the outstanding external debt and the costs of the private sector’s credits based on foreign currencies. The revenues of Turkey’s private sector are overwhelmingly based on the Turkish lira despite its high stocks based on foreign currencies.

The escalation in exchange rates leads the Central Bank to raise interest rates so as to cope with foreign debts and provide external sources for the primary deficit financing, as the credit costs also rise in the meantime.  

The relations between the NATO allies have steadily worsened due to some different diplomatic approaches, particularly after an escalating row over the trial of American pastor Andrew Brunson in Turkey, leading the Turkish lira to an ongoing loss of value.