EditTurkey: ‘Reckless’ monetary policy taking its toll
Erdoğan’s "New Economic Model" prioritised low interest rates to combat inflation, leading to significant economic turmoil
Turkish President Recep Tayyip Erdoğan’s unorthodox low-interest experiment triggered runaway inflation, a collapsing lira, billions in losses, and eroded middle-class wealth—leaving lasting damage despite the belated return to rational policy, writes EUalive’s partner LevantIntel.
In September 2021, as the world watched in awe and scholars repeatedly warned against it, Turkey formally launched its “New Economic Model” (YEM), which rested on the premise that “interest rates are the cause, and inflation is the result.”
The model clashed with the prevailing economic doctrine, which prescribes high interest rates to cool inflation, but Erdoğan endorsed such causality.
Over the years, this bold experiment cost the country some $60 to $100 billion.
The “unorthodox” monetary policy had been in the making since 2018, following the transition to the Presidential System.
Between 2019 and 2021, Erdoğan dismissed three central bank (CBRT) governors due to discord over interest rates. The fourth governor bowed to Erdoğan’s will, but Turkish economic policy, in the meantime, fell into disrepute as not only whimsical but also unpredictable.
By September 2021, despite annual inflation already climbing toward 20%, the CBRT began a series of aggressive interest rate cuts, gradually slashing the policy rate from 19% to 8.5% in the months that followed.
The government argued that a competitive Turkish Lira (TRY) would boost exports, shrink the current deficit, and suppress inflation by creating an FX surplus. This was justified on the grounds of emulating the Chinese model and turning Turkey into a global manufacturing hub through low labour costs.
It didn’t quite go their way. The rate cut triggered a massive sell-off of TRY. The USD/TRY exchange rate spiked to over 18 in late 2021, up from around 8 in early that year.
To stop the freefall without raising interest rates, the government resorted to substantial backdoor FX sales, to the point that CBRT net reserves (excluding swaps) dropped to a record low of minus $60bn.
When backdoor sales failed to stop the meltdown, the government introduced the Foreign Exchange Protected Deposit (KKM) scheme.
The idea was to incentivise citizens to stick to TRY by promising that the Treasury (and, from mid-2023 onwards, the CBRT) would pay the difference if the USD appreciated faster than the interest gains.
Halt dollarisation
KKM, therefore, effectively pegged TRY returns to USD, turning the government into the ultimate insurer of FX risk.
The intention was not only to halt dollarisation but also to score political points ahead of the 2023 elections, prompting the government to prioritise cheap credit, low unemployment, and high growth over price stability.
Such palliative measures only made the patient sicker: In October 2022, annual inflation reached 85% according to official figures and 180% according to independent calculations.
KKM burned a huge hole in the government’s pockets. From 2021–24, the total cost to Treasury and CBRT balance sheets is estimated to have reached 5.8% of GDP.
In 2023 alone, CBRT reported a staggering $25bn loss, almost entirely due to KKM commitments.
The policy of keeping interest rates deeply negative (up to -75%) not only triggered a historic inflation spike but also facilitated a massive wealth transfer from fixed-income earners and savers to borrowers and asset owners.
From June 2023, once the elections were won, the government reverted to an orthodox, or, as Finance Minister Mehmet Şimşek calls it, “rational” monetary policy, but the damage was already colossal.
Financial apocalypse
Lira became one of the world’s worst-performing currencies. The USD/TRY rate stands at 42.8 as of December.
As Turkey is an import-dependent economy, TRY depreciation made energy and raw material imports significantly dearer, feeding a vicious cycle.
Inflation, wealth transfers, and, finally, the government’s disinflationary measures virtually dissolved the middle class and starved the lower classes, widening existing disparities. Finally, Turkiye’s economic credibility and investment attractiveness were shredded.
Şimşek brags about liquidating KKM reserves while arguing that, despite their high cost, the alternative was a total financial apocalypse.
The opposition, on the other hand, maintains that this was a manufactured crisis that burned through decades of national savings in just a couple of years.
All in all, the root cause of all this was an extremely reckless experiment, and one that international investors will not easily forget.
Caption: File photo. Turkish President Recep Tayyip Erdogan looks on during a joint press conference with German Chancellor Friedrich Merz (not pictured) at the Presidential Palace in Ankara, Turkey, 30 October 2025. EPA/NECATI SAVAS
Updated: January 31, 2026 - 08:48
