Mustafa Kutlay | Senior lecturer in the Department of International Politics at City, University of London

Turkish President Recep Tayyip Erdoğan has stated several times that he believes high inflation is the outcome of high interest rates. This goes against the mainstream paradigm suggesting that the relationship is the other way around. With a series of reductions in interest rates, the government aims to stimulate domestic investment and support export-oriented sectors. Also, the depreciation in the Turkish lira is expected to attract foreign investment and boost overall economic growth.

However, the decision to cut interest rates comes with a trade-off. The new economic policy targeting lower interest rates is likely to spur inflation. At a time when several emerging markets are preparing for tighter monetary policy, the subsequent cuts in interest rates—along with geopolitical risks—has led to a weakening of the lira. As Turkey’s economy is reliant on imported goods in several sectors—energy, raw materials, and intermediate goods—the currency depreciation is increasing the pressure on consumer prices. Annual inflation currently hovers around 20 percent, according to official figures. Also, the hike in consumer prices is likely to further undermine income distribution.

An appropriate long-term strategy for Turkey would be to adopt a coherent set of policies that improves the country’s productive capacity and high value-added export performance, so as to maintain price stability and control current account deficits. Any economic policy compact is, for sure, conditioned by political context. In any case, three components stand out—macroeconomic stability, a conducive political-economic institutional environment, and a well-crafted industrial policy.


Gönül Tol | Director of the Turkish Program at the Middle East Institute in Washington, D.C.

Turkey’s President Recep Tayyip Erdoğan has declared himself an “enemy of interest rates.” He wants borrowing costs reduced. This alone does not make him an unconventional politician. But he has other ideas that rattle economists. He espouses an unconventional theory that elevated interest rates cause inflation. To put his views into action, he doubled down on his low-rates policy last week, which plunged the Turkish lira to all-time lows. The currency’s crash came after a difficult year when the lira lost as much as 45 percent of its value. Despite criticism from opposition parties and protests in Ankara and Istanbul calling on the government to resign, Erdoğan vows to keep pushing for lower interest rates.

To the Turkish president, his approach makes the best sense. His revulsion with high interest rates can partly be explained by his Islamist background. He thinks they are prohibited by Islam. But his views on this were also shaped by his experience as a businessman. He thinks low interest rates are necessary to boost economic growth, create jobs, cut inflation, and attract foreign investment. He argues that higher borrowing costs slow the economy down. They also result in price hikes because businesses reflect the increase in borrowing costs in the price of their products. Erdoğan thinks that lower interest rates will boost investment, production, and employment and that the lira’s weakness will boost Turkish exports, decrease imports, and balance the current account deficit, which will lower inflation.

But here is the problem. Economists warn that interest rate cuts will drive up inflation, which is already four times the official target, and erode Turks’ earnings and savings. It will not boost production either. Many producers rely on imported goods and energy, which means their input costs will increase. The logic of attracting foreign investment due to the lira’s weakness is also problematic. Erdoğan needs a lot more than that to attract foreign investors. The “new Turkey,” where institutions have crumbled, rule of law has been dismantled, and one man’s whims determine everything, including monetary policy, is hardly an attractive destination for them.


Aykan Erdemir | Senior director of the Turkey program at Foundation for Defense of Democracies in Washington, D.C.

Turkish President Recep Tayyip Erdoğan has been unequivocal in his crusade against interest rates, which he denounced in 2018 as “a tool of exploitation” analogous to the “heroin trade” and decried as “the mother and father of all evil.” Erdoğan’s fight against interest rates has gone beyond strong rhetoric and has extended to his intense pressure on the Turkish central bank and its monetary policy committee to reduce the policy rate.

The Turkish president’s unorthodox economic worldview reflects not only his long-held ideological convictions, but also peculiar dynamics of the country’s crony-capitalist economic order. On the ideological side, Erdoğan’s worldview goes beyond the traditional Muslim belief that riba (interest or usury) is haram (forbidden) and extends to an anti-Semitic conspiracy theory to which the Turkish president subscribes. Erdoğan has frequently voiced his opposition to the “interest rate lobby,” a thinly-veiled reference to a cabal of Jewish financiers committed to destroying Turkey’s economy in order to control the country.

On the nonideological side, a well-choreographed patronage network sustains the Turkish president’s ruling coalition, which depends on Erdoğan’s ability to inflate and sustain the real estate bubble at the core of his complex system for funding his political enterprise and distributing the spoils. This fragile order requires constant monetary stimulus to boost consumption and keep the president’s inner circle of business friends financially afloat.

Although this toxic mix of ideology and material self-interest has resulted in an unprecedented devaluation of the Turkish lira and double-digit inflation, Erdoğan doesn’t seem to have the capability to wean himself off his conspiracies or his cronies.


Henri Barkey | Professor of international relations at Lehigh University

President Recep Tayyip Erdoğan has long been convinced that inflation is caused by high interest rates that increase the cost of borrowing and manufacturing. He has done away with the Turkish central bank’s independence and aggressively pursued reductions in its policy rate. This stands in direct contradiction to mainstream economic principles. It is also said that his opposition to high interest rates originates in his deeply held Islamic beliefs.

What is pushing him to act now is the fact that he will be facing an election within the next eighteen months, by June 2023. Erdoğan is wary of the recessionary effects of high interest rates. Higher rates would endanger what he needs most, namely an economy that is buoyant and creating employment. The Covid-19 pandemic hurt Turkey just like it did every other society, but the Turkish economy rebounded strongly by some 21 percent during the second quarter of 2021, which was expected to result in an annual growth rate of 8.5 percent. However, most economists expect a return to lackluster growth in 2022.

Erdoğan has been in power continuously since 2003. This, however, is the first time he is encountering such a high inflationary environment. Hence, he lacks the knowledge and experience needed to deal with such a crisis, and is also impatient. He is convinced that he is right and thinks he knows more than anyone else. Moreover, he has surrounded himself with people who are, simply put, yes-men. As a result, no one dares to challenge him, and this is also evident in the coverage of newspapers that are linked to him, and which parrot whatever he says and believes. Erdoğan has successfully managed to bend all state institutions to his will.


Sinan Ülgen | Visiting scholar at Carnegie Europe in Brussels

President Recep Tayyip Erdoğan and his team of economic advisers believe in a different economic theory than most people. Their expectation is that a policy of negative real interest rates and an associated depreciation of the domestic currency would enhance Turkey’s international competitiveness. As a result, exports would grow, leading to higher production, higher employment, and value added. The government would then profit from this economic rebound through its greater popularity before the critical presidential and legislative elections in mid-2023.

There are many problems with this theory. First, the ensuing acceleration of inflation is likely to eliminate any improvement in international competitiveness in the medium term. More importantly, the prevailing negative real interest rate will continuously trigger a flight of savings from the Turkish lira to foreign currencies. At present there is no incentive for domestic savers to keep their bank deposits in liras. On the contrary, the value of their savings will continue to depreciate for as long as nominal interest rates are below the rate of inflation. This discrepancy will therefore continue to fuel demand for foreign exchange and lead to the depreciation of the lira, and overall to higher inflation.

Second, the rapid depreciation has impoverished Turkish citizens. Their purchasing value has diminished considerably. Turkey’s annual per capita income denominated in U.S. dollars has also decreased to around $7,000. In fact, since 2013, which was the peak year for the Turkish economy, per capita incomes in U.S. dollar terms have decreased every year. The most likely consequence of this ill-considered economic experiment will, therefore, be a shrinking economy, in tandem with a further loss of political support for the current leadership.