Date: 20 August 2026

Special Correspondent, SesTurkiye Desk

For years, Turkey served as a textbook warning of what happens when ideology replaces basic economics. President Recep Tayyip Erdogan famously declared himself an "enemy of interest rates," forcing an unorthodox monetary policy on the Central Bank of the Republic of Türkiye (CBRT).

Instead of raising rates to cool down prices, Erdogan ordered aggressive rate cuts, claiming that high interest rates cause inflation. This low-rate dogma didn't spark growth. Instead, it triggered a devastating cost-of-living crisis, historic currency depreciation, and a massive drain on the country's economic reserves.

The Unorthodox Drop: Slashing Rates Amid High Inflation

In late 2021, when sensible central banks worldwide were preparing to hike rates to counter pandemic-era price pressures, Turkey went the opposite way. Under intense political pressure from the presidency, the CBRT slashed its benchmark interest rate from 19% down to 8.5% by mid-2023.

The immediate results of this approach were highly predictable:

- Lira Collapse: The Turkish lira lost roughly 80% of its value against the US dollar over a five-year period. By mid-2023, the lira had fallen to a mere shadow of its former strength.

- Imported Inflation: As the currency weakened, the cost of importing essential energy, raw-materials, and machinery skyrocketed, passing straight to consumers.

The Pivot to Hyperinflation

By ignoring standard monetary policies, Turkey triggered a massive inflationary spiral. Rather than stabilising prices, the low-rate cuts pushed inflation out of control.

Historical Peak Inflation (TurkStat) vs. Policy Trajectory 

[2020] ── 12.6% (Pre-experiment baseline) 

[2021] ─────36.08% (Rate cuts begin) 

[2022] ─────────────────────── 85.51% (The Hyperinflation Peak) 

[2024] ─────────────────── 75.45% (Residual momentum) 

[2026] ────32.2% (Post-u-turn recovery under Simsek)

According to data from the Turkish Statistical Institute (TÜRKSTAT), official accepted annual inflation peaked at a staggering 85.51% while actual inflation by independent measurement by ENAG was much higher at 137.55% in October 2022. Basic expenses like housing, food, and utilities outpaced regular wages, pushing millions of middle-class Turkish citizens into poverty.

Defending the Defenceless: Burning Through FX Reserves

To maintain low interest rates without letting the lira crash entirely, Erdogan’s administration used backdoor market interventions. The central bank sold off its foreign currency reserves to artificially prop up the domestic currency.

This backdoor support caused a massive drop in state reserves:

- The Bottom: By May 2023, Turkey’s net foreign currency reserves dropped to just $2.33 billion.

- Deep Negative Territory: When subtracting billions of dollars borrowed through short-term swap agreements from local commercial banks, Turkey’s net international reserves plunged deep into negative numbers.

This intervention left the country highly vulnerable. Turkey lacked the foreign currency buffers required to cover its external debt obligations and current account deficit, leaving it reliant on short-term financial injections from friendly foreign regimes.

The Inevitable U-Turn: A Return to Reality

Following the May 2023 elections, the sheer weight of economic reality forced an inevitable policy shift. Erdogan appointed Mehmet Şimşek as Treasury and Finance Minister, alongside a new central bank leadership team.

The new economic team immediately abandoned the low-rate policy, executing a massive monetary correction that raised interest rates from 8.5% to 50%. By mid-2026, these orthodox measures brought annual inflation down toward 32%, while net international reserves recovered to around $30.7 billion.

Conclusion: A Costly Lesson in Economic Dogma

The stabilization seen by 2026 highlights that Turkey's economic crisis was entirely preventable. The high inflation and depleted reserves were direct consequences of a political ideology that ignored basic economic principles. While Turkey works to rebuild its institutional credibility and heal its economy, the Turkish public continues to pay the price for years of economic mismanagement.