The earlier Central Bank of the Republic of Turkey (CBRT) helped break the Lira. Today’s CBRT has contained much of the direct exchange-rate pass-through, but it has not yet broken the inflationary habits the currency collapse left behind.
USD/TRY traded near 8.60 in mid-2021. On August 14, 2026, it closed near 48.00. That is a rise of roughly 456% in just over five years: the US Dollar now buys more than five times as many Liras as it did before the Central Bank of the Republic of Turkey (CBRT) began its aggressive easing cycle. Turn the quote around, and the damage looks starker still. The Turkish currency has lost about 82% of its value against the Greenback.
There were interventions, emergency measures, relief rallies and long stretches of managed depreciation. None changed the direction of travel. For anyone who bought USD/TRY in 2021 and simply held on, the trade has been almost embarrassingly one-sided.
But the chart is no longer the whole inflation story. The original currency shock raised the cost of imported energy, raw materials and consumer goods. Then it did something more dangerous: it taught households and businesses to expect the next depreciation, the next tax rise and the next price reset. Turkey’s inflation problem migrated from the exchange-rate screen to wages, rents, contracts and everyday pricing decisions.
The rate-cut gamble that broke the spell
The first part of the verdict is difficult to soften. Indeed, in September 2021, the CBRT began cutting its policy rate from 19% even as inflation pressure was building. By the end of that year, the rate was down to 14%. Easing resumed the following year, and the One-Week Repo Rate rate reached 8.5% in February 2023.
Low rates did not merely make Lira-denominated assets less attractive. The sequence damaged the central bank’s reaction function: investors, companies and households could no longer assume that higher inflation would be met with tighter policy. Once that belief broke, every new currency move became harder to contain.
The policy U-turn came in June 2023 after the CBRT shockingly raised rates from 8.5% to 15%, then continued all the way to 50% by March 2024. That tightening was real, aggressive and eventually effective in slowing demand and limiting fresh exchange-rate pass-through. It was also late. By then, the economy had already learnt to price itself defensively.
The Lira passed the baton
Exchange-rate pass-through remains powerful in Turkey, but it is not a fixed mechanical coefficient. The CBRT estimates that a permanent currency depreciation typically feeds about 15% into prices over a year. The effect becomes larger when the move is abrupt, persistent and expected to continue.
The most revealing piece of evidence is the bank’s own decomposition of the 23.3%-point surge in annual inflation during the third quarter of 2023: Lira depreciation accounted for 4.3 points; fuel effects added 4.8 points; tax changes, 2.5 points; and other conventional drivers, 1.6 points. The largest contribution, 10.1 points, came from deteriorating expectations and changes in price-setting behaviour.
That is the handover. TRY delivered the original shock; expectations amplified it. Once companies began repricing more frequently and households started treating depreciation as the default, inflation became capable of reproducing itself even when the exchange rate was relatively calm.
Disinflation keeps stopping for red lights
July’s inflation data showed the headline CPI eased to 31.75% from 33.52% a year earlier. That is progress, but hardly a victory lap. Over the same 13-month stretch, monthly inflation repeatedly broke the rhythm: 3.23% in September, 4.84% in January and 4.18% in April. July’s 1.78% increase was softer, yet still too high to deliver rapid convergence toward the central bank’s goal.
Furthermore, the latest Inflation Report makes the credibility problem visible. On August 13, the CBRT raised its end-2026 inflation forecast to 28%, while retaining a 24% interim target. The revision reflected higher Lira-denominated import prices, food, administered prices and changes to the fuel-price system. That said, “forecast” and “target” now describe two different destinations.
The Lira still falls. Imported inflation no longer leads.
The breakdown in the July report marks the point where the current story diverges from the old one. Core goods inflation, the component most exposed to imported inputs and the exchange rate, stood at 16.82% annually, while falling 0.38% during the month. Services inflation was 39.70% annually and 3.18% monthly.
If the Lira were still the dominant immediate driver, import-intensive core goods should be the main contributor. They are not. Services inflation is more than twice as high, while the CBRT says the relatively stable currency has alleviated cost pressure and helped annual producer inflation ease to 27.83%.
The real exchange rate supplies another clue: USD/TRY rose 1.76% in July, but Turkish consumer prices increased 1.78%. Once we included Turkey’s inflation differential against its trading partners, the CPI-based Real Effective Exchange Rate rose to 105.96. The Lira weakened in nominal terms but appreciated in real terms. That helps explain why the currency can keep setting fresh nominal lows, even as core goods have not returned to the centre of the inflation story.
Services are where inflation learned to live
Turkey’s sticky inflation now sits in categories shaped by wages, contracts, taxes, administered prices and backward indexation. In July, annual rent inflation was 45.29%, transport services 50.09% and communication services 40.02%. Healthcare services jumped 16.41% in one month after a revision to medical examination copayments, which the CBRT estimates added 0.22 percentage points to July CPI.
These prices do not respond to monetary policy as quickly as imported consumer goods: in fact, rents reset when contracts roll over, education adjusts around the academic calendar, and restaurants respond to wages, food and utilities. In addition, transport absorbs fuel costs, and administered prices arrive by decision rather than by demand. The result is inflation with memory.
The January 2026 CPI overhaul makes this persistence more visible. After the Turkish Statistical Institute, TURKSTAT, adopted a 2025 base year and a new classification, the services weight rose by 7.4 points to 38.4%. The bank now estimates that the heavier services weight could add about one percentage point to 2026 annual inflation. That is not evidence that the data were manipulated. It is evidence that the consumption basket now gives greater weight to the part of the economy where inflation is hardest to kill.
Three realities, one policy rate
The sharpest credibility gap is not between the CBRT and financial markets. It is between the CBRT and the public. Twelve-month inflation expectations stand at 23.95% for market participants, 32.50% for firms and 44.94% for households.
Against the 37% policy rate, the exact ex-ante real rate is roughly +10.5% for markets and +3.4% for firms, but -5.5% for households. Even the 40% effective funding rate still looks negative in real terms from the household perspective. Only 17.63% of households expect inflation to decline over the coming year.
That divide matters because households negotiate wages, landlords reset rents and firms decide how much buffer to build into prices. Monetary policy can be restrictive on a spreadsheet and still lack traction if the people setting everyday prices do not believe the disinflation story.
The new CBRT inherited the fire – but it owns the extinguisher
Blaming today’s CBRT for every part of the crisis would be analytically lazy. The current regime reversed the 2021-2023 experiment, tightened policy aggressively and contained much of the direct exchange-rate channel. Domestic demand is weak, producer-price pressure has moderated and the lira’s volatility is lower than it was during the crisis years.
But inheritance is not immunity. The present CBRT still owns the next stage of the fight. Its August inflation report concedes that expectations remain above both forecast and target and that backward indexation in rents and education will slow the fall in services inflation. It also raised the end-2026 forecast to 28%, above the 24% interim target it chose to keep.
The central bank cannot control food supply, Oil prices, geopolitics or every administered-price decision. It can control whether policy remains tight enough and for long enough to change behaviour. That means resisting premature easing, improving communication and forcing a sustained convergence in expectations, not merely celebrating a lower headline rate created by base effects.
So, who broke the Turkish Lira?
The earlier CBRT bears much of the responsibility. Cutting rates into rising inflation weakened the currency, damaged the policy anchor and turned depreciation into an expectation. The scale of USD/TRY’s move since 2021 is the market’s verdict on that experiment.
But the reason inflation is still paying the price is more complicated. The lira no longer needs to collapse every month for the damage to persist. Backward indexation, wage and rent resets, taxes, administered prices and defensive pricing have become their own transmission mechanism.
All in all
The Lira lit the fire. Indexation keeps it burning. Credibility will decide when it finally goes out.
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