Türkiye's Inflation Experiment

How Türkiye cut interest rates while inflation soared, what happened to the lira, and the sharp policy reversal that followed.

Türkiye is a large emerging economy linking Europe and Asia, with strong manufacturing, tourism and construction sectors. In the early 2020s, it ran one of the most closely watched monetary policy experiments in the world.

The unorthodox approach

Standard economics says central banks should raise interest rates to fight high inflation. Türkiye’s President Recep Tayyip Erdoğan argued the opposite: that high interest rates cause inflation. From late 2021, under his pressure, the central bank cut interest rates even as inflation rose. The central bank governor was replaced several times in a few years.

What happened

The lira collapsed: the currency lost a large share of its value against the dollar in late 2021 and continued to weaken.
Inflation soared: official annual inflation peaked at around 85 percent in October 2022, the highest in about 24 years.
Households suffered: real wages fell, and many people shifted savings into dollars, gold and property.

To limit the damage, the government introduced a scheme protecting lira deposits against currency losses, which became very costly.

The reversal

After elections in May 2023, a new economic team was appointed. The central bank raised its main interest rate from 8.5 percent to 50 percent by March 2024, returning to orthodox policy. Inflation began to fall from its peak, though it remained high for some time.

Why low rates can backfire

When interest rates are far below inflation, saving in lira loses value quickly. People rush to buy dollars, gold or goods before prices rise further. This weakens the currency, raising import prices and inflation further. Cutting rates, intended to support growth, instead fed the spiral.

Lessons

Most economists see Türkiye’s experience as confirming standard theory: when inflation is high, holding interest rates far below inflation tends to weaken the currency and make inflation worse. It also highlighted the importance of central bank independence.

Thinking low interest rates always help an economy

Low rates can support borrowing and growth when inflation is under control. When inflation is high, very low rates can drive money out of the currency, fuel inflation and hurt savers and wage earners.

Key takeaways

Türkiye cut interest rates from late 2021 despite rising inflation.
The lira collapsed and inflation peaked around 85 percent in October 2022.
After 2023 elections, the central bank raised rates to 50 percent by March 2024.
The episode underlined the importance of orthodox policy and central bank independence.