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Such difficulties are symptoms of eccentric monetary policy. In 2021, facing inflationary pressure that caused central banks everywhere to raise interest rates, Turkey cut them. Believing that low rates lower inflation—the opposite of economic orthodoxy—Mr Erdogan has repeatedly strong-armed Turkey’s central bank to slash its policy rate. Indeed, the overnight policy rate now stands at a cool 8.5%. According to official figures, annual inflation hit 86% in 2022 (see chart 1).

Inflation has since softened—either to 44%, according to official estimates, or to something higher, according to independent ones. Mr Erdogan’s lackeys boast he was right all along. In fact, inflation has dropped because of a fall in energy prices, central-bank intervention in currency markets and “base effects”, where past price rises lift the base from which inflation is calculated. Regardless, Mr Erdogan looks likely to continue with his policy, at least for a time. In his victory speech he maintained that, alongside looser monetary policy, “inflation will also fall”.

Mr Erdogan is right about something, however. Inflation in Turkey is a puzzle for economists, even if not in the way he suggests. The persistence of low interest rates and high inflation suggests Turkey’s real interest rate has been deeply negative for some time. This ought to become rapidly unsustainable, since it enables speculators to profit handsomely by borrowing in lira and investing in stable assets such as housing or other currencies, further depreciating the lira and turbocharging inflation. How, then, have real interest rates stayed negative for so long? And what does it mean for the future path of inflation?

In the sectors where interest rates are less distorted, though, nominal interest rates have moved in the opposite direction to the policy rate (see chart 2). Since investors do not believe the central bank will act to stop inflation in the future, inflation expectations have risen. This has fed into higher consumer-lending rates, especially for longer-term loans, because investors demand a higher return the lower the purchasing power they expect the lira to hold in the future. Therefore judged by consumer-loan rates, real interest rates may not be all that negative.

Similarly, returns on other assets are much higher than the central bank’s policy rate suggests. This is causing firms, households and investors to flee the currency. The government wants to support the lira, but there is only so much it can do. Your correspondent was blessed with many thanks when—short of time—he paid for a taxi in Istanbul using dollars at the market exchange rate, rather than the less generous black-market one. Suppliers are taking matters into their own hands, pricing items in dollars, points out Bekir, a shop owner in Istanbul’s Grand Bazaar. Assets other than foreign currencies are also attracting investment, as parties scramble to protect their savings. Ms Demiralp notes there are, for instance, “long lines outside car dealerships”. House prices have grown at triple the rate of official inflation. Some speculate about the potential for an attack on the lira from foreign investors.

The government has tried to stem currency flight. Exporting firms must sell 40% of their foreign currency revenues to the central bank. In late 2021 the government introduced a scheme whereby some lira deposits are protected against depreciation. In an extremely costly and not entirely sustainable situation, almost a quarter of all deposits are now covered.

What, then, to make of the Fisher equation? Short-term policy rates have been quite negative, but they are much less relevant for borrowing, since market rates have either risen owing to higher inflation expectations, or credit has been rationed. In other areas the result has been a dash from the lira, prompting use of soft capital controls. If Mr Erdogan were to hold down market interest rates across the board, the result might well be hyperinflation.