Turkish lira CRISIS: Turkey facing turmoil as inflation rockets to 15-year high

The currency has slumped by a massive 40 percent against the US dollar so far this year alone, hit be fears over President Recep Tayyip Erdogan’s control over monetary policy and an escalating diplomatic fead with the US.

The country’s central bank signalled that the worsening outlook for inflation was becoming a bigger risk, saying its stance would have to be adjusted at its next meeting on September 13 – despite not raising its benchmark rate in nearly three months despite the worsening currency crisis.

After official data that showed inflation at 17.9 percent in August – marking its highest level since late 2003 – the bank said: “Recent developments regarding the inflation outlook indicate significant risks to price stability.

“The central Bank will take the necessary actions to support price stability.”

Turkey’s Finance Minister Berat Albayrak has said that the country’s central bank is independent of the government and will take all necessary steps to combat inflation.

He does not expect any problems in the banking sector, which is in stark contrast to a number of warnings from ratings agencies that the lira sell-off could significantly weaken lenders’ assets.

Speaking to Reuters, Mr Albayrak said: “The central bank in Turkey has been maybe more independent than those in other countries,” adding the country has reached a point where it requires a “full-fledged fight against inflation”.

It is the latest twist after weeks of feuding between Turkey and the US as relations between the two nations threatens to reach breaking point.

The huge fall in the lira has been triggered by the current stand-off between US President Donald Trump and Mr Erdogan over Christian pastor Andrew Brunson.

He has been detained in Turkey for 21 months on terrorism charges and is currently under house arrest.

Last month, Mr Trump doubled tariffs on Turkish metal imports and warned he would give no concessions in return to Mr Brunson’s release.

Turkey quickly retaliated by doubling tariffs on US car, alcohol and tobacco imports.

Mr Erdogan has refused to back down in the face of increasing pressure, repeating his opposition to high interest rates that he has labelled the “mother and father of all evil”.

According to estimates by investment bank and financial services firm JPMorgan, £139bn ($179bn) of Turkey’s external debt matures in the year to July 2019 with around £113bn ($146bn) of that owned by the private sector.

Last week, ratings agencies Moody’s and Fitch both both painted a bleak picture on the outlook for banks, with the latter estimating that banks’ foreign currency lending now stood at 43 percent of all loans.

But despite this, Mr Albayrak remains unmoved, and said: “I have no reason to be worried at this stage. But we are aware how important the banking sector is.

“We are in a close coordination and cooperation with our banks and the (banking watchdog) BDDK.

“We are not expecting any problems in the banking sector, but in case of a problem, we will support them in every way.”

Turkey’s Finance Minister also brushed off fears about debt, including in the private sector.

He said the current account deficit will be “considerably below” by year-end and “much stronger” in 2019.