English translation of a column by Prof. Dr. Mehmet Karaçuka, originally published in Seferihisar Yeni Haber on 16 May 2025 as “Yüksek Faiz ve Ekonomik Dengeler.”
Investment is the engine—the driving force—of a market economy. More investment creates more jobs, and a greater capacity to employ workers raises wages and incomes. Investment, in turn, is financed through three main channels: accumulated savings, the sale of shares or equity partnerships, and borrowing.
All three sources of finance are highly sensitive to interest rates. Interest represents the return on relatively risk-free assets. To attract savings into productive investment, the expected return on an investment must exceed the interest rate. Likewise, an investment financed through borrowing must generate a return higher than the interest payable on the loan. Otherwise investors lose money. No one knowingly undertakes an investment that is expected to make a loss. Equity-market financing is sensitive to interest rates for essentially the same reasons.
Something is clearly wrong with an economic regime in which the effective interest rate is 49%. The principal reason for maintaining such high rates appears to be the need for foreign currency, a point that monetary authorities have implicitly, if not explicitly, acknowledged. A deputy governor of the Central Bank of the Republic of Turkey (CBRT) has stated that the previous economic administration had experienced a foreign-exchange crisis.
In effect, the CBRT uses high interest rates to draw Turkish lira out of goods markets and into financial markets. In doing so, it aims to reduce demand for foreign-currency assets and encourage some holders of those assets to switch back into lira. For this strategy to work, the interest rate offered must exceed the risk premium arising from political and economic uncertainties, particularly inflation. As those risks grow, the central bank may feel compelled to raise rates even further.
But is this what the central bank should be doing? Successful economic policy depends on aligning instruments with clearly defined objectives. The current approach has reduced the demand of lower- and middle-income households, particularly people on fixed incomes. Indeed, the erosion of real incomes as wage increases lag behind inflation has been even more effective in reducing their purchasing power than high interest rates. Meanwhile, some wealthier households receiving high interest income have seen their incomes rise significantly. High interest payments also increase the money supply, which is often identified as a principal cause of inflation.
Another adverse consequence of high interest rates appears in public finances. Budget deficits have exceeded expected and planned levels. Non-interest government spending has increased by around 30% in nominal terms compared with the previous year, implying a decline in real terms. Resources directed toward the real economy through public expenditure have therefore fallen. By contrast, budgetary interest payments have increased by roughly 100%. The implication is clear: as the government borrows at high interest rates, public resources and tax revenues are redirected from productive economic activity toward wealthy financial asset holders.
Households face similar pressures. A large portion of salaries is absorbed by credit-card interest payments, eroding disposable income. A rise of around 70% in banks’ non-performing receivables suggests that growing numbers of families are struggling to repay their debts.
High interest rates and monetary policy more generally are tools for addressing cyclical problems. Turkey’s deeper problems—notably foreign-currency shortages and persistent inflation—require structural transformation rather than day-to-day policy measures. Such transformation is possible only through a change in policy paradigm. Turkey has more than enough physical and human resources to accomplish it. Otherwise, an interest-rate policy that has already reached its limits will cease to offer solutions. Persisting with such a cyclical approach risks deepening the country’s economic difficulties and could lead to serious economic turmoil.
Original Turkish article: Seferihisar Yeni Haber — Yüksek Faiz ve Ekonomik Dengeler (16 May 2025).
