The Hormuz Shock and Turkish Lira Risk

Turkey is currently facing a compound crisis of a high-inflation trend and a continuous decline in the value of the lira, and under this structural vulnerability, if a supply shock originating from the Strait of Hormuz is inflicted, its spillover effect on consumer prices is projected to exceed the level of simple arithmetic addition.

• As households with lira-based incomes simultaneously bear the shocks of the currency’s external depreciation and rising domestic prices, there is a likelihood that the pace of erosion of real purchasing power will be further accelerated.

• Producing firms, even if they do not pass on cost-increase pressures all at once, will have an increased incentive to shorten the cycle of product price readjustment starting from the point at which their existing inventories are fully exhausted.

• While a delayed pattern may be observed on macroeconomic indicators, a sharp increase in the frequency of price revisions, suppliers’ preemptive reflection of costs, and consumers’ defensive purchasing behavior may erupt simultaneously in the micro domestic market.

• If existing inflationary inertia, expectations of currency depreciation, and firms’ risk-averse price-setting mechanisms combine, they may further raise the overall speed of domestic price adjustment itself.

In summary, within a lira-denominated price system with maximized volatility, an exogenous supply shock induces an acceleration of the price adjustment cycle, and this change in speed may, in turn, cause a vicious cycle that non-linearly amplifies lira risk and domestic market instability.