Osman Şenkul
The Monetary Policy Board of the Central Bank of the Republic of Turkey (CBRT) took one of the most significant steps in recent history on 23 September 2021, lowering the policy interest rate by 100 basis points from 19 per cent to 18 per cent. Immediately afterwards, the dollar exchange rate, which had started the day at 8.63 lira, exceeded 8.80 lira. One month after the first rate cut, on 21 October 2021, the CBRT lowered the policy rate by 200 basis points to 16 per cent. Following the decision, the dollar rose by more than 3 per cent on a daily basis, hitting a record high of 9.53 lira; on the same day, the euro exceeded 11 lira and the pound exceeded 13 lira. The price of gold per gram also hit a new record high of 543 lira.
Prior to this cut, the policy rate had last been raised in March 2021, increasing by 200 basis points to 19 per cent, but this increase cost Naci Ağbal his job. President Recep Tayyip Erdoğan dismissed Central Bank Governor Ağbal.
Erdoğan had repeatedly expressed his dissatisfaction with the interest rate hike and said, ‘They keep talking about “price stability”, but we have put that aside,’ when he announced the reform package on 12 March.
The CBRT cut its policy rate by another 100 basis points in November 2021. The rate fell from 16 percent to 15 percent. Following the decision, the dollar surpassed 11.29 lira.
Erdoğan, at the AKP Parliamentary Group Meeting prior to this interest rate decision, stated, “To our colleagues who support interest rates, I apologise… I cannot and will not stand alongside those who support interest rates on this path. As long as I am in this position, I will continue my fight against interest rates and inflation to the end. The “nas” is clear on this issue. With the “nas” clear, what is happening to you and me?”
At the last Monetary Policy Committee meeting of the year, the Central Bank cut its policy interest rate by another 100 basis points, from 15 per cent to 14 per cent. After the decision, the dollar exceeded 15.72 lira, and the lira’s daily loss in value exceeded 5 percent. On 20 December 2021, the dollar rose to 18.43 lira. That same evening, Erdoğan announced the Currency-Protected Deposits (C-PD) system. Throughout December, the Central Bank intervened five times in response to the rising exchange rate. It announced that it sold $844 million in its first intervention on 1 December, $504 million in its second intervention on 3 December, $687 million in its third intervention on 10 December, $3.12 billion in its fourth intervention on 13 December, and $2.1 billion in its fifth and final intervention on 17 December. The total balance of these five interventions amounted to 7.3 billion dollars.
Thus, the interest rate cuts implemented since September 2021 had reached 500 basis points. The dollar, which stood at 8.63 lira before the first interest rate cut, rose to 18.43 lira with the interest rate cut in December 2021, and closed the year at 13.32 TL with the measures announced and the interventions made by the Central Bank, which were reported to amount to 7.3 billion dollars. However, in an assessment made on 20 March 2023, Bloomberg Economics economist Selva Baziki stated, ‘We estimate that the CBRT’s backdoor foreign exchange market interventions since December 2021 may have reached $128 billion.’
During the same period, Reuters, another international news agency that closely monitors intervention traffic, like Bloomberg, also reported that the identifiable intervention volume during the same period exceeded $150 billion. The question ‘Where is the $128 billion?’ raised by the opposition following the dismissal of Central Bank Governor Naci Ağbal, alleging that it was sold from Central Bank reserves, became a topic of discussion in Turkey after posters hung on political party buildings and billboards were removed by order of the public prosecutor.
The Central Bank did not continue with interest rate cuts between January and July 2022 and kept the policy interest rate, which it had lowered to 14 per cent in December 2021, unchanged until 18 August 2022. During this period, the dollar/TL rose from 13.32 to 18.05.
The Turkish Statistical Institute (TurkStat) published consumer and producer price indices in August 2022. The data showed that consumer inflation exceeded 80 per cent. This marked the highest level of consumer inflation recorded since 1998. Producer inflation stood at 143.75 per cent annually. In December, inflation declined due to the base effect. According to TÜİK, inflation in December 2022 was 64.27 per cent on an annual basis. December inflation was announced as 1.18 per cent.
In addition, the burden on the Treasury from the C-PD application, which was introduced by the government to curb foreign exchange, continued to increase. According to Central Government Budget data announced by the Ministry of Treasury and Finance, in December, excluding foreign exchange conversions, 973.1 million TL was transferred from the budget to Currency-Protected Deposits. Thus, the total cost from March 2022 to the end of the year reached 92 billion 538 million 964 thousand TL. Following the 50 basis point cut in February, interest rates remained unchanged until June. During this period, the dollar rose from 18.87 lira to 23.56 lira.
Mehmet Şimşek, who previously served as Minister of Economy and Minister of Finance, returned to lead the economy on 4 June 2023, marking his return to the cabinet after a five-year hiatus.
The failure to reduce even the “TurkStat inflation rate” through operations involving such significant fluctuations in interest rates, and particularly the inability to achieve the ‘target inflation rate’ used as the basis for determining public sector employee and pensioner salaries, has drawn strong reactions from political parties, trade unions and civil society organisations. This must have caught the attention of the International Monetary Fund (IMF) as well, given that in its statement titled “IMF Executive Board Concludes 2025 Article IV Consultation with Turkiye” issued on 13 February, ahead of the Monetary Policy Committee meeting on 12 March, where interest rate decisions will be made, it focused extensively on the issue of interest rates.
“Inflation declined from 49.4 per cent (annualised) in September 2024 to 30.9 per cent in December 2025, supported by strong fiscal consolidation, prudent revenue policies, and a tight monetary policy stance. Following a temporary slowdown in mid-2024, GDP growth maintained its strong momentum and is projected to reach 4.1 per cent in 2025. Strengthened lira demand supported international reserves, and the current account deficit continued to be adequately financed.”
The IMF emphasises that its ‘tight monetary policy’ and ‘moderate wage growth’ will support a ‘gradual’ decline in inflation, adding:
‘With additional reductions in policy interest rates and increased confidence, the growth rate for 2026 is expected to be 4.2 per cent. While the current account deficit continues to be financed at an adequate level, depositor confidence and strong gold prices will ensure that reserves remain around 80 per cent, the IMF’s adequacy benchmark.’
The IMF management did not stop there, of course, and while demanding a tighter monetary policy to definitively reduce inflation, it emphasised that policy interest rates should be adjusted based on data and taking into account their macrofinancial effects:
“To enhance policy credibility and strengthen transmission, Executive Board members emphasised the importance of a simplified monetary policy framework focused on the policy interest rate, with strengthened central bank independence and communication. Board members recommended that while allowing for a gradual increase in exchange rate flexibility alongside better anchoring of inflation expectations and the rebuilding of reserve buffers, foreign exchange interventions should be limited to reducing volatility.”
IMF Executive Board members also emphasised that ‘it is necessary to remain vigilant, particularly given that foreign exchange liquidity risks remain high,’ and supported ongoing efforts to strengthen supervisory and analytical frameworks, including the strengthening of supervision, including of crypto assets.
In short, the IMF, which stepped in when even TurkStat inflation could not be reduced, made two ‘very important’ recommendations for reducing inflation: ‘tight monetary policy’ and ‘moderate wage increases.’ In other words, while advising the government to ‘keep interest rates high’ to reduce inflation, it also did not neglect to issue the command, ‘Do not overdo wage increases…!’, ignoring the cries of poverty rising from all corners of the country, especially from wage earners and pensioners. such as the sudden release of wage increases in January that had been held in reserve until December 2025, and thus not included in wage and salary increase calculations.