Expert Comment — Eurasia Programme
26 January 2026
Turkey’s economic narrative has been one of the most dramatic in emerging markets. From the growth miracle of the 2000s to the currency crises of the 2020s, the country now stands at a crossroads. The return to orthodox monetary policy under Governor Hafize Gaye Erkan and her successor has raised the policy rate from 8.5 per cent to 50 per cent, signalling a break with the unorthodox past. But the question that markets and policymakers are asking is whether this pivot represents a genuine transformation or merely a temporary tactical adjustment before political pressures reassert themselves.
The Roots of the Crisis
Turkey’s currency crisis is not the result of a single policy error but of a decade of institutional degradation. President Erdoğan’s conviction that high interest rates cause inflation — the opposite of conventional economic theory — led to a cycle of rate cuts, currency depreciation, and inflation that fed on itself. The lira lost over 80 per cent of its value against the dollar between 2018 and 2024. Inflation peaked at over 85 per cent in October 2022 and remained above 60 per cent well into 2024, eroding household purchasing power and devastating fixed-income savers.
The central bank’s credibility was systematically undermined. Four central bank governors were appointed and replaced between 2019 and 2023, each more accommodating than the last. The bank’s independence, already fragile, was effectively eliminated. The result was a classic emerging-market currency crisis, amplified by Turkey’s unique institutional vulnerabilities. As the ${ln(“Peterson Institute for International Economics noted”, “https://www.piie.com/research/piie-charts/turkeys-currency-crisis-explained”)}, the combination of large external financing requirements, low foreign exchange reserves, and politically dependent monetary policy created a textbook case of self-fulfilling currency depreciation.
The Return to Orthodoxy
The May 2023 election brought a pivot not in political leadership but in economic policy. The appointment of Hafize Gaye Erkan, a former Wall Street executive, as central bank governor signalled a willingness to restore orthodox monetary policy. The policy rate was raised from 8.5 per cent to 50 per cent over nine months, one of the most aggressive tightening cycles in emerging-market history. The lira stabilised, inflation began a slow decline, and foreign investors tentatively returned to Turkish markets.
The tightening cycle has restored a measure of credibility, but credibility is like trust — it takes years to build and seconds to destroy. The question is not whether the current policy stance is appropriate but whether it will survive the next political shock.
The sustainability of the orthodox pivot remains uncertain. President Erdoğan, who appointed the current economic team, has publicly endorsed the new approach, but his ideological commitment to low interest rates has not changed. The local elections in March 2024 and the presidential election cycle loom in the background. Markets are pricing in a risk premium for political uncertainty, and Turkish dollar bonds continue to trade at levels consistent with significant default risk.
Structural Vulnerabilities
Even with sound monetary policy, Turkey faces formidable structural challenges. The current account deficit, while narrowing, remains over 3 per cent of GDP, financed increasingly by volatile short-term capital inflows rather than stable foreign direct investment. The corporate sector carries significant foreign currency-denominated debt, creating balance-sheet vulnerabilities whenever the lira depreciates. The banking sector, while stronger than during the 2001 crisis, faces rising non-performing loan ratios as high interest rates squeeze borrowers.
The country’s growth model, based on construction-led expansion, cheap credit, and imported intermediate goods, has reached its limits. Productivity growth has been weak for a decade. Value-added in manufacturing has stagnated relative to peers. The education system does not produce the skills the economy needs. These are not problems that monetary policy can solve. They require structural reforms — in education, the legal system, labour markets, and the investment climate — that Turkish governments have consistently deferred.
Turkey’s economic trajectory depends on whether the orthodox policy pivot is sustained and deepened, or whether it proves to be a temporary interlude before a return to unorthodoxy. The most likely scenario is a middle path: the central bank maintains a broadly orthodox stance but at a lower interest rate than markets would prefer, inflation declines slowly rather than rapidly, and growth remains mediocre. This scenario avoids a crisis but also avoids a transformation. It is a path of muddling through rather than fundamental reform — and in the long run, muddling through may not be enough to address Turkey’s deep-seated structural challenges.