Osman Şenkul
According to some, interest, defined as the “price of money,” appeared alongside money and money-like instruments and was mostly determined on a seasonal or annual basis, depending on local production and harvest developments, and was mostly recorded and implemented using clay tablets or similar instruments.
In today’s world, where digital technologies are developing at a dizzying pace, interest rates are now determined at the global level, are valid for terms that can sometimes be measured in seconds or even shorter periods, and can change at the same speed. As money continues to exist in its digital form, interest, which has emerged alongside money, will also persist. When money ceases to exist in its physical forms—metal, paper, or digital—and is erased from balance sheets, interest will remain for humanity as nothing more than a historical factor.
The fact that money has existed alongside humanity for only a very short period of time, covering the last few thousand years of its existence on Earth, shows that it does not have a vital quality for us. Therefore, like many other phenomena and factors that are not vital for humanity, money, along with interest and all its derivatives, will disappear into infinity. While it is nearly impossible to predict the exact timeline of this process today, witnessing the transformation of money—from plastic cards to QR codes, from radio waves to the blockchain (cryptocurrency) spiral—and observing how it accelerates the struggle for survival may serve as evidence that this process is not as distant as it seems, without being a utopian approach.
In Turkey, too, the destructive effects of interest rates, which sometimes rise to “astronomical” levels depending on the conditions of the day, are being felt quite severely, as seen in recent developments. This is because attempting to manage the economy with high interest rates—or, in other words, pursuing a monetary tightening policy—while effective in the short term for curbing inflation, also brings about significant economic, social, and sectoral costs for society.
First and foremost, borrowing costs are rising, making it increasingly difficult for individuals to access credit cards or loans for necessities and housing; consequently, consumption is declining. A decline in consumption means that production is disrupted, and as production decreases, jobs at the beginning of the production line also decrease, leading to rising unemployment. In such situations, investments are naturally postponed because companies avoid using credit due to rising interest rates.
Of course, during such periods, small businesses with weak cash flow are unable to continue their operations, and bankruptcies increase, particularly in labour-intensive sectors such as construction and textiles. Consequently, layoffs accelerate, especially in sectors where production and domestic demand are contracting. Naturally, income distribution deteriorates in the wake of all these developments.
While all this is happening on the side of those with fixed incomes, the living conditions of those who earn interest income improve even further. Meanwhile, the government is forced to pay higher interest rates on its domestic debt.
To illustrate this, in the first six months of this year, a total of 1 trillion 111 billion lira in interest payments were made from the central government budget. Interest payments increased by 94% compared to last year. The government paid an average of 185 billion lira per month and 6.2 billion lira per day in interest payments in the first six months of this year. The interest payments made from the budget in six months accounted for 87.5% of the total interest paid in 2024, and it appears that Turkey will pay 11 times more interest in 2025 than it did in 2021. This situation will strain the budget and, of course, social expenditures will be restricted.
During periods of rapid interest rate increases, mortgage rates also rise, bringing home purchases to a standstill. Demand for rentals increases, and rents rise. The housing crisis worsens, especially in large cities. Access to necessities such as food, energy and rent becomes more difficult. Purchasing power declines, and quality of life deteriorates.
When asked, ‘Why is a high interest rate policy necessary despite all this?’ the defence may be that ‘A high interest rate policy is a powerful tool for controlling inflation in the short term’; however, as seen and experienced, it has devastating effects on production, employment, and social welfare in the long term. Therefore, it is not sufficient to raise interest rates alone; they must be implemented alongside production-supporting structural reforms.
However, as has been the case many times in Turkey to date, while public resources have been spent freely at times, no additional measures have been taken to increase production. As a result, even though demand has been suppressed, supply has not been increased, and inflation has not been curbed. Because, in a country like Turkey that is dependent on external sources, interest rate hikes may suppress demand-driven inflation, but they cannot halt the rise of cost-driven inflation. In particular, due to rising resource costs caused by high interest rates, difficulties in borrowing prevented the creation of new job opportunities. Additionally, price increases linked to cost hikes driven by uncontrollable inflation further exacerbated the situation. As inflation expectations failed to improve, the anticipated impact of interest rate hikes on inflation did not materialise; contrary to expectations, inflation remained stubbornly high. Consequently, rather than closing, the gaps in the country’s economy continued to widen and deepen.
In its report titled ‘2025 – Global Sector Report – Global Imbalances in a Changing World,’ released at the beginning of the week, the International Monetary Fund warns that countries with ‘excessive deficits,’ such as Turkey, whose economy is described as ‘weakening,’ face the following risks:
‘The primary risk for countries with excessive deficits is a rapid increase in risk premiums, which could lead to a sudden loss of market access and force them into a sudden and painful adjustment process. If the country holds significant weight in the global economy or is highly interconnected with other countries, the associated economic downturn could also harm other countries.’
The key point highlighted by these warnings is that, in countries like Turkey, where reliance on external financing has created deficits, these deficits will be difficult to close solely through high interest rates. Despite suppressed exchange rates, increased external financing inflows could easily raise production costs, making it challenging to achieve inflation targets.
The IMF report draws attention to countries with excessive surpluses, as well as those with deficits:
“Excessive surpluses also pose risks. First, excessive surpluses in some countries mean excessive deficits in others. By lowering interest rates, they may encourage other countries to borrow excessively. In situations where global interest rates cannot be adjusted downward, a liquidity trap may form, and excessive surpluses could suppress global activity. An increase in surpluses in large economies could lead to serious sectoral imbalances in trading partners and fuel protectionist sentiments, which could have harmful effects on the global economy.”
Following all of this, the interest rate cut announced by the Central Bank of the Republic of Turkey (CBRT) at its 24 July Monetary Policy Committee meeting comes to mind. The CBRT reduced the one-week repo auction interest rate, which serves as the policy rate, from 46% to 43%, and the overnight lending rate from 49% to 46%. However, this reduction does not immediately affect Turkey’s external borrowing. This is because the main factor determining the cost of external borrowing for Turkey, or any other country, is the credit risk premium known as CDS (Credit Default Swap). Turkey’s CDS, which was already high, rose quite rapidly, especially after 19 March.
The arrest of CHP presidential candidate Ekrem İmamoğlu led to a sharp rise in CDS. Turkey’s CDS, which was at a relatively calm level of 240 bps at the beginning of 2025, rose rapidly to 304 bps. After this peak in CDS, although a more horizontal and cautious trend was observed in July, it remained at high levels of 280–290 bps. However, the downward trend in CDS spread reversed again due to currency pressure, portfolio outflows, and political uncertainties. CDS spread, which has maintained an average of approximately 284–291 bps every week, reached 291.7 bps as of 18 July.
CDS rose from 240 bps in 2025 to 304 bps. After peaking in June, it has been more flat and cautious in July. However, the fact that CDS remains at high levels of 290 bps means that Turkey’s borrowing costs still carry a risk premium. This implies that, rather than reducing inflation by increasing domestic production and thereby curbing unemployment, policies aimed at lowering inflation by raising interest rates and suppressing supply are instead fuelling unemployment, blocking new investments, and driving away international investors rather than attracting them; and, of course, in such circumstances, domestic investors are also being deterred.
First and foremost, Turkey’s CDS premium, which stood at around 300 bps in 2025, increased the external borrowing costs of both the public and private sectors. This, in turn, widens the budget deficit, makes it harder for companies to secure credit, weakens the investment environment, and therefore, a decline in CDS is not merely an ‘improvement in an indicator’; it is a strategic development that directly impacts costs and economic confidence.
If CDS premiums rise, as we have seen in Turkey, the Treasury’s dollar-denominated borrowing costs increase, leading to higher interest payments and, consequently, a larger budget deficit. At the same time, Turkish banks and companies must pay higher interest rates when borrowing in foreign currency from abroad. This leads to delayed investments and increased bankruptcy risks. Furthermore, when CDS is high, capital inflows to Turkey decrease, foreign exchange supply tightens, and consequently, pressure on the Turkish Lira increases.
For this reason, combating inflation caused by rising prices of goods sold in markets and bazaars by simply increasing the ‘price of money’ has mostly had negative effects, as has been the case in the period we are living in. However, based on the general principle that the market price is ‘the price determined by the interaction of supply and demand for a good,’ choosing to ‘increase supply’ rather than ‘suppress demand’ can lower prices without increasing unemployment. Because if the supply of a good exceeds demand, its price temporarily falls below its value; if demand exceeds supply, its price rises above its value.