Low rates, high inflation: the 2018-2023 experiment

The Central Bank of the Republic of Turkey held interest rates below prevailing inflation for much of the period after 2010, but the divergence became extreme from September 2021, when the bank cut its policy rate from 19% to 14% by year-end even as inflation was already accelerating, on the view that lower rates would eventually curb price growth by boosting investment and exports. The lira depreciated sharply as a result, and annual inflation reached a 24-year high above 85% in October 2022. This was not the first attempt at a different approach: in 2018-19 the bank briefly reverted to orthodoxy, raising rates to 24% and intervening in currency markets, which brought inflation down from 25.2% in October 2018 to 8.6% a year later, before the unorthodox low-rate stance returned and intensified. Governor Şahap Kavcıoğlu, defending the program in a mid-2023 address archived by the BIS, continued to frame low rates as consistent with disinflation even as the lira's depreciation and consumer prices kept accelerating in the charts, a divergence that persisted until a change of government economic team shortly afterward forced a reversal.