Turkey’s inflation rate soared to almost 25 per cent in September according to the Turkish Statistical Institute as the impact of a recent currency crisis has led to a boom in prices across the economy. It marked a sharp rise from 17.9 per cent in the previous month. The spike in consumer price inflation was driven by huge rises in transportation costs, which rose 37 per cent year-on-year, as well as food prices that were up 28 per cent. Miscellaneous goods and services rose 31 per cent.

Turkey’s central bank sharply hiked interest rates last month as it sought to get runaway inflation under control. But the bank may have limited room to further increase rates given the strong opposition of Recep Tayyip Erdogan, the Turkish president.

The hefty price increases follow an August currency crisis that saw the lira suffer volatile swings after a row with Donald Trump exacerbated underlying fears about the health of the Turkish economy. The currency has lost around 37 per cent of its value against the dollar since the start of the year, pushing up the cost of fuel and other imports.

Erdogan has lambasted the bank for failing to control inflation and repeated his view that high interest rates cause rather than slow inflation, which goes against every economics textbook. Speaking after last month’s hike, Mr Erdogan said that his patience with the institution would last “up to a point”.

On its face, Turkey’s current financial crisis bears a striking similarity to the collapse of Thailand’s currency in 1997, which ultimately lead to a financial meltdown across Asia. But emerging markets have evolved over the past two decades, and economies have become more insulated from the risk of contagion. As Turkey’s risk of default rises, it is unlikely to cause a repeat of the crisis that spread through emerging markets in the late 90’s.

What makes Turkey particularly vulnerable is its level of external debt, which has grown rapidly as growth plans were met with enthusiasm from foreign investors. While its total debt-to-GDP is below the Emerging market average, Turkey is significantly reliant on foreign capital with 70% of its debt denominated in U.S. dollars and Euros compared to 35% for the average peer. Its current account deficit is close to 6% of GDP making it vulnerable to a shock if foreign investors pull back.

The credit rating agencies, Moody’s and S&P, recently downgraded Turkey deeper into high yield territory. They cited concerns with central bank independence, unpredictable policymaking and a forecasted recession next year as reasons for a deteriorating outlook.

Beyond interest rate hikes, Turkey must commit to fiscal discipline and restore relationships with the U.S. and world partners in order to avoid a continued slide down the slippery slope the country is currently heading on.