Empirical Evaluation of President Erdoğan’s Interest Rate Policy

Abstract

In 2022, Türkiye and the global economy encountered complex challenges such as escalating energy costs, high inflation, and reduced economic growth. Türkiye’s economy was particularly impacted by a substantial current account deficit, a sharp depreciation of the Turkish lira, and soaring inflation, notwithstanding a small increase in exports. The Central Bank’s low-interest-rate policy from October 2021 worsened these conditions, causing further lira value declines. This sustained low-interest-rate environment adversely impacted various markets, including goods and services, credit, foreign exchange, and labor, thus magnifying the economic strain. Foreign trade deficits expanded and foreign investments dwindled, while exchange rates caused a 34% increase in import values, contrasting with a mere 12.85% growth in exports. The study explored the complex relationship between inflation and exchange rates in Türkiye’s economy, revealing bidirectional causality. This interaction emphasizes the significant influence of interest rates on inflation through shifts in exchange rates, further complicated by the Central Bank’s interventions. The study recommends a comprehensive and proactive macroeconomic strategy, including growth-fostering political and economic policies and careful monitoring of the untenable low-interest-rate policy to avoid potential hyperinflation and currency crises, which are crucial for Türkiye’s economic stability and future growth.