Economic Toll Of Inflation Control: Turkeys Weakest Growth Since Covid Reveals Rising Costs Of High Interest Rates

Turkey’s economic growth has slowed to its weakest level since the Covid-19 crisis, driven largely by the central bank's efforts to control runaway inflation through high interest rates. While inflation has shown signs of easing, the side effects of these inflation-fighting measures have significantly impacted businesses and households. Turkey now faces the difficult challenge of balancing the need to stabilize prices with the growing strain on its broader economy.

Turkey’s Economic Performance Post-Covid

Since the height of the Covid-19 pandemic, Turkey’s economy has gone through periods of recovery and instability. In the immediate aftermath of the pandemic, there was a brief resurgence in growth, driven by government spending and an influx of consumer activity. However, this growth was soon undercut by rising inflation, which surged due to a combination of global supply chain disruptions, currency devaluation, and energy price spikes.

As a result, Turkey’s GDP growth has slowed dramatically in recent quarters, with the latest figures showing a marked decrease in economic activity. Compared to the robust pre-pandemic growth rates, Turkey’s current performance represents its weakest since the onset of the Covid crisis. This slowdown has raised concerns about the country’s economic trajectory and its ability to sustain long-term growth.

Central Bank’s Inflation Control Measures

In response to the rising inflation, Turkey’s central bank adopted an aggressive monetary policy centered on high interest rates. These rate hikes were intended to curb inflation by reducing consumer demand and stabilizing the Turkish lira. By making borrowing more expensive, the central bank hoped to reduce liquidity in the market, thereby cooling down price increases.

The central bank’s primary goal was to protect the Turkish economy from hyperinflation and prevent further currency devaluation. While the policy succeeded in slowing inflation, the cost of this strategy has been a significant slowdown in economic growth. Businesses and households alike have been squeezed by higher borrowing costs, and economic activity has contracted as a result.

Business Sector Reactions

For businesses, particularly small and medium-sized enterprises (SMEs), the high interest rates have created numerous challenges. Access to credit has become more difficult, with higher borrowing costs making it harder for businesses to secure the financing they need to invest in growth. Many companies have been forced to delay or cancel expansion plans, reduce their workforces, or cut production.

Industries such as manufacturing, construction, and retail have been hit especially hard. In the manufacturing sector, companies face rising operational costs as the price of raw materials and imported goods continues to climb. The construction industry, traditionally reliant on loans and credit lines for large-scale projects, has seen a sharp decline in new developments. Retailers, meanwhile, are struggling to maintain sales as consumers cut back on spending in the face of rising prices and shrinking disposable income.

Impact on Turkish Households

The impact of high interest rates has been particularly painful for Turkish households. As borrowing costs have risen, so have mortgage payments, car loans, and credit card debt. Many families are finding it increasingly difficult to afford basic necessities, as the cost of living continues to outpace wage growth.

Consumer spending, a key driver of the Turkish economy, has also taken a hit. With households tightening their budgets, there has been a noticeable decline in retail sales and other sectors that rely on discretionary spending. At the same time, rising interest rates have made it harder for families to access affordable credit, limiting their ability to purchase homes, cars, or make large investments.

This financial strain has broader social implications as well. Many households are now at risk of defaulting on loans, and the potential for a spike in bankruptcies or foreclosures looms. In this environment, economic inequality is likely to worsen, as lower-income households bear the brunt of the economic slowdown.

Long-term Economic Risks

While the central bank’s measures have brought inflation down from its peaks, the long-term risks of sustained high interest rates are becoming more apparent. Economic growth has stalled, and the potential for a prolonged period of stagnation is rising. Without robust economic activity, businesses may continue to suffer, leading to increased layoffs and higher unemployment.

Additionally, the ongoing economic pressure on households could lead to social unrest, especially if inflation remains elevated and economic conditions do not improve. The combination of slow growth, high borrowing costs, and stagnant wages creates an environment ripe for dissatisfaction and discontent.

Prospects for Policy Adjustment

There is growing debate among economists and policymakers about whether Turkey’s central bank should consider adjusting its policies to support growth. While inflation control remains a priority, many argue that maintaining high interest rates indefinitely could do more harm than good. Lowering interest rates gradually, while introducing targeted fiscal measures to support businesses and households, may help Turkey strike a better balance between inflation control and economic recovery.

Some experts suggest that the central bank could look to adopt more flexible policies, such as offering lower interest rates for key industries or providing tax breaks for small businesses to stimulate growth. In addition, increased government spending on infrastructure and development projects could help reignite economic activity without compromising inflation targets.

Conclusion

Turkey’s battle to control inflation through high interest rates has come at a significant cost, with economic growth slowing to its lowest level since the Covid-19 crisis. Businesses are struggling to stay afloat, and households are facing mounting financial pressure. While the central bank’s policies have successfully reduced inflation, the broader economic challenges cannot be ignored. To avoid long-term stagnation, Turkey may need to adopt a more nuanced approach that balances inflation control with sustainable growth, offering relief to those most affected by the current economic conditions.

Author: Ricardo Goulart