Turkey’s Inflation Crisis

Causes, Policies and the Uncertain Road Ahead

Turkey’s economy is a paradox that fascinates economists and frustrates its citizens in equal measure. It is a country rich in young human capital and strategic geography, yet perpetually at the mercy of volatile currencies, political interference in economic institutions, and stubbornly high inflation. In 2025, Turkey is living through the consequences of a decade of unorthodox monetary experiments and fiscal overreach, even as it attempts to chart a course back toward orthodoxy and stability.

This article unpacks the state of the Turkish economy, the roots and repercussions of its massive inflation crisis, what the government and central bank are doing about it, whether these measures are working, and what risks and choices lie ahead.

1. The Current State of the Turkish Economy

For decades, Turkey has prided itself on its dynamic private sector and resilient entrepreneurial spirit. It is a G20 country with a diversified industrial base, significant agricultural output, and a central role in connecting Europe and Asia.

However, since the late 2010s, it has been equally known for severe boom-bust cycles. In 2025, the macroeconomic picture remains mixed:

• Economic growth has slowed compared to the post-pandemic rebound and reconstruction surge after the devastating earthquakes in early 2023. While GDP grew more than 5% in 2023, it is now expected to expand by about 3% in 2025 — a healthy number in isolation, but modest for an emerging market that needs robust growth to absorb a young workforce and rising living costs.
• Unemployment sits just below 9%, higher than Turkey’s pre-crisis levels but not catastrophic. However, underemployment and informal labour hide deeper weaknesses.
• The export sector remains robust, particularly in automotive parts, white goods, and textiles, but competitiveness is undercut by volatile input costs and the high cost of borrowing.
• Consumer sentiment remains low: Turks have endured years of price shocks, erosion of savings, and a steep decline in real incomes. Many households devote over half their income to rent and food, leaving little disposable income to drive demand in other sectors.

In summary, the real economy still shows signs of resilience, but household budgets are tight and businesses face high financing costs and unpredictable input prices. This backdrop frames the biggest challenge: inflation.

2. What Caused Turkey’s Massive Inflation Crisis?

To understand Turkey’s predicament, one must grasp the interplay of policy choices, structural vulnerabilities, and political factors that have kept inflation so high for so long.

Currency Depreciation and Unorthodox Monetary Policy

At the heart of the crisis lies Turkey’s relationship with interest rates. President Erdoğan has repeatedly expressed a personal belief that high interest rates cause inflation — an inversion of conventional economic wisdom. Under his influence, the central bank slashed rates dramatically in the late 2010s and early 2020s even as inflation rose.

This led to a vicious cycle: low rates encouraged credit expansion and spending but undermined confidence in the lira. As capital fled to safer currencies and gold, the lira weakened, making imports more expensive and feeding inflation further. The central bank spent billions of dollars of its foreign reserves trying to prop up the currency but was fighting a losing battle.

By the time the policy was reversed in mid-2023, the damage was profound: the lira had lost more than 80% of its value against the US dollar compared to five years earlier. Turkish companies, many of which have foreign currency-denominated debts, struggled to service loans. Consumers saw everyday staples become unaffordable.

Import Dependence and Exchange-Rate Pass-Through

Turkey relies heavily on imports for energy, raw materials, and intermediate goods vital for domestic manufacturing. Consequently, a weaker lira rapidly translates into higher prices for fuel, food, electronics, and other essentials.

Unlike some economies where local supply chains buffer exchange rate swings, Turkish households feel currency depreciation at the supermarket, the petrol station, and in rent payments, which are often indexed informally to dollars or euros.

Fiscal Stress and Political Factors

On top of monetary policy missteps, the government’s fiscal choices have added to the strain. Major infrastructure projects, generous public-private partnership guarantees, and post-disaster spending have widened deficits. While not yet catastrophic, fiscal slippage has undermined investor confidence.

Political instability has exacerbated the crisis. Key local elections, unexpected arrests of opposition leaders, and fears of further democratic backsliding have triggered capital outflows and speculative attacks on the lira.

Entrenched Expectations

Years of repeated inflation spikes have taught Turkish households to expect high inflation. This self-fulfilling pattern makes the job of the central bank harder. Households bring forward purchases to hedge against future price hikes, and workers demand steep wage increases to keep up. Businesses pass costs down the chain, keeping price rises alive even when demand softens.

3. How Bad Is Inflation in Turkey?

After peaking at over 75% in mid-2024, consumer inflation has slowed but remains eye-wateringly high by international standards. As of mid-2025, the headline figure hovers just above 35%. Core inflation — which excludes volatile items like food and energy — is only slightly lower, indicating that underlying price pressures remain widespread.

Inflation for essentials is even higher than the average: food prices have risen over 70% year-on-year at points, and rents in major cities have doubled or tripled in the past three years. Energy costs, though temporarily restrained by state subsidies and trade deals, also weigh heavily on households.

For comparison, developed economies consider inflation over 3% a cause for concern; Turkey’s rates are an order of magnitude higher.

4. What Is Turkey Doing to Address It?

After years of resisting conventional wisdom, the government has embraced more orthodox measures — at least for now.

Monetary Tightening

Under new leadership, the central bank has hiked its main interest rate repeatedly, pushing it to an eye-watering 46%, with a policy corridor that can effectively raise borrowing costs closer to 50% for some market participants.

This is intended to choke off credit growth, cool demand, stabilise the lira, and persuade people to save in lira rather than dollars. So far, the rate hikes have helped slow the pace of price increases but at the cost of higher borrowing expenses for businesses and households.

Fiscal Discipline

The government has also pledged fiscal tightening: raising indirect taxes like VAT and fuel levies, postponing some infrastructure spending, and trying to keep wage hikes moderate. Finance Minister Mehmet Şimşek, a figure trusted by markets, has pushed for transparency measures, like publishing lists of major tax delinquents to restore confidence in public finances.

These moves aim to reduce deficits and signal to investors that Turkey is serious about controlling inflation.

Foreign Exchange Management

The central bank continues to intervene periodically to stabilise the lira, although it has fewer reserves to burn than in past crises. Efforts are underway to rebuild reserves through foreign trade deals and by encouraging foreign capital inflows, including renewed talks with Gulf states and efforts to maintain ties with Russia despite Western scrutiny.

5. Will It Work?

There are cautious signs of progress. Inflation has declined steadily from its peak, the currency has stabilised within a volatile band, and the central bank has regained a measure of credibility with financial markets. The OECD and IMF forecast further moderation of inflation in the coming year, possibly falling below 20% by 2026 if discipline holds.

However, the path is precarious. High interest rates depress domestic investment and consumer spending, threatening a deeper economic slowdown. Households already battered by years of inflation find it harder to access affordable credit, and businesses face expensive borrowing costs just as they try to expand exports and manufacturing.

Political risks are omnipresent. Any abrupt policy reversal, new political crisis, or external shock — like a spike in global oil prices — could reignite capital flight and send the lira tumbling again. The government’s history of sudden shifts in economic policy also makes investors cautious.

6. The Options, Risks, and Economic Implications

Turkey faces a narrow path between fighting inflation and sustaining economic growth. Here’s how the trade-offs stack up:

Keep Rates High

Pros: Anchors inflation expectations, stabilises the lira, restores credibility.

Cons: Suppresses domestic demand, raises unemployment, hurts small businesses.

Ease Monetary Policy Too Soon

Pros: Boosts short-term growth, relieves pressure on indebted households and firms.

Cons: Risks another currency slide, inflation rebound, and loss of credibility — leading to worse crises later.

Maintain Fiscal Discipline

Pros: Reduces reliance on foreign borrowing, builds confidence, supports the currency.

Cons: Can feel like austerity: cutting spending and raising taxes during high inflation can fuel public discontent.

Structural Reforms

Pros: Long-term resilience through tax reform, independent judiciary, stronger institutions.

Cons: Politically hard to push through, payoffs take years, not months.

Turkey must also manage its geopolitical balancing act. Deepening ties with Russia for discounted energy and trade hedges its bets but risks friction with NATO allies and EU accession ambitions.

7. The Broader Outlook

Turkey’s struggle is a cautionary tale about what happens when monetary policy becomes politicised and central banks lose independence. Rebuilding that credibility is painstaking, and while progress is visible, it is fragile.

For Turkish households, the big question is whether real incomes will recover meaningfully. Even if inflation slows to 20% next year, many families will not feel the benefit immediately because prices are already so much higher than five years ago.

For businesses, the outlook depends on whether stable conditions can attract sustained foreign investment and whether the lira can avoid further plunges that complicate foreign debt servicing.

In the longer term, Turkey has vast potential: a young population, a strategic location, and entrepreneurial dynamism. If reforms can stick, inflation can be tamed and sustainable growth restored. If they cannot, Turkey may find itself repeating the cycle once again.

Conclusion

Turkey’s battle with inflation is far from over, but a credible plan and disciplined execution offer a way out. Whether policymakers can stay the course amid political and social pressures will determine if the hard-won gains of 2025 mark a turning point — or merely another pause before the next crisis.

In the end, it is not just about interest rates or budget deficits. It is about restoring trust: in the currency, in institutions, and in the promise that tomorrow’s lira will still buy what today’s did.