The Last 10 Years of the Turkish Economy: Interest Rates, Exchange Rates, and Inflation

Turkey’s economic performance over the past decade can be technically analyzed through the lenses of the “impossible trinity (trilemma)” and “expectation management”, two concepts frequently referenced in economic literature.

The 2015–2025 period can be examined in three distinct phases, each clearly illustrating how monetary policy choices have shaped exchange rates, inflation, and capital flows.

Lives changing for centuries beneath the same skyline, an Istanbul that never changes.

Phase 2: 2021–2023

Negative Real Interest Rates and an Inflationary Break

This period represents the phase in which the conventional monetary policy framework in Türkiye was most severely strained, and where the sharpest structural break in the charts occurred.

The Widening Gap

• Inflation climbed from around 20% to nearly 80%

• Meanwhile, the policy rate was reduced from 19% to 8.5%

This combination created a deeply negative real interest rate environment, a situation rarely observed in economic history.

The Exchange Rate–Inflation Spiral

As the interest rate channel lost its effectiveness:

• Households and investors moved away from the Turkish lira

• Demand for foreign currency, housing, and other tangible assets increased

During this process:

• Demand-pull inflation

• Cost-push inflation

were activated simultaneously, leading to a near-vertical rise in prices.

Impact on USD/TRY

During this phase, the exchange rate became both a cause and a consequence of inflation. The exchange rate pass-through coefficient approached historical highs, reinforcing the inflationary dynamics.

Inflation – Policy Rate – USD/TRY Chart (2021–2023)

Phase 3: 2024–2025

Disinflation and the Search for Normalization

This period, which began after the 2023 elections, represents a shift in monetary policy direction. The primary objective is to re-anchor expectations by restoring a positive real interest rate environment.

A transition toward a normalization attempt focused on financial stability and disinflation.

Monetary Tightening

• The policy rate has been gradually increased to 50%.

• Liquidity has been tightened with the aim of cooling domestic demand.

Disinflation Process

The decline in inflation observed from the second half of 2024 onward should be interpreted together with:

• Demand contraction

• Base effects

• A controlled exchange rate regime

Technical Risks

• Keeping interest rates high for an extended period may create pressure on the real sector and employment.

• Premature rate cuts carry the risk of re-anchoring inflation expectations upward.

This balance represents the most critical point of the 2025 outlook.

Summary of Technical Correlations

Variable Relationship	Technical Impact
Interest Rate < Inflation	Capital flight from TRY, dollarization, asset bubbles
Interest Rate > Inflation	Carry trade inflows, exchange rate stabilization, cooling demand
Exchange Rate Pass-Through	A 10% increase in FX → contributes ~2–3% to inflation within 3–6 months

Conclusion: A Sharp Regime Shift in the Turkish Economy

The charts of the past decade present a clear picture:Turkey has made a sharp transition from a “low interest rate – high exchange rate” experiment to a “high interest rate – disinflation” model.

The key question heading into 2026 is:

Can inflation be reduced permanently while interest rates are lowered in a controlled manner, without disrupting the exchange rate–expectation balance?

The answer to this question depends directly on:

• Consistency in monetary policy,

• Credibility in expectation management, and

• Global financial conditions (U.S. interest rates, carry trade appetite).

At Investment Atlas, we will continue to analyze this process not through headlines, but through data, correlations, and charts.