The high interest rates in Turkey have significantly impacted economic growth rates, as the country’s Gross Domestic Product (GDP) slowed both quarterly and annually during the second quarter of this year. According to the Turkish Statistical Institute, seasonally and calendar-adjusted GDP grew by only 0.1% in the second quarter, down from 1.4% growth in the previous quarter. Data also revealed that annual GDP growth declined to 2.5%, with the first-quarter growth revised down to 5.3% from 5.7%.
Analysts surveyed by Bloomberg had predicted a quarterly contraction of 0.5% and annual growth of 3.2%. First-quarter growth was driven by domestic demand, boosted by rising minimum wages and inflation expectations, leading to increased consumption. The Central Bank of Turkey has raised interest rates almost sixfold to 50% since last year to curb spending and control inflation, which currently exceeds 60%. Last month, the central bank indicated that early indicators point to a slowdown in domestic demand during the third quarter due to rising interest rates.
Turkey is also facing a growing liquidity crisis as its currency devalues amid persistent inflation, posing challenges for an economy heavily reliant on cash for daily transactions. The highest-value banknote, the 200 Turkish lira (about $5.80), now represents over 80% of the total cash in circulation, compared to only 16% in 2010, according to data from the Central Bank of Turkey. Years of rampant inflation have eroded the purchasing power of the highest denomination note; in 2010, it was worth approximately $140, whereas today it barely covers the cost of two cups of coffee at Starbucks. This disparity is evident in key areas like Istanbul’s Grand Bazaar, where heavy carts and temporary bags are used to transport large amounts of cash needed for transactions, according to Bloomberg News.
The Turkish newspaper Ekonomi reported that some bank branches need to refill ATMs three times a day due to increasing cash demand. It also noted that ATMs might soon stop dispensing notes smaller than 100 lira. However, authorities have not yet announced plans to print higher-denomination banknotes. In June, Central Bank Governor Fatih Karahan stated that studies on this issue are ongoing. For many Turks, this crisis recalls the 1990s when chronic inflation forced the government to remove six zeros from the currency to create the new Turkish lira in use today. Despite the annual inflation rate falling below 50% last month, price surges in recent years—peaking at 85% in 2022—have severely weakened individuals’ purchasing power.
A month ago, the International Monetary Fund (IMF) urged Turkey to continue tightening monetary policy and rely on data until inflation approaches the target rate, following consultations under Article IV. The IMF stated that policy shifts have reduced economic imbalances and restored confidence, adding that improved market sentiment has led foreign and domestic investors to turn towards lira-denominated assets.
