85.5%. That was Turkey’s annual inflation rate in October 2022 — the highest in 24 years, in the world’s 12th largest economy, in a NATO member state.

Erdoğan had cut interest rates during the inflation spike. On purpose. His theory was that high rates cause inflation, not cure it. The Turkish lira agreed. Then it disagreed.

Turkey is not a small economy. US$1.1 trillion in GDP (World Bank, 2024) makes it the 12th largest economy globally. 85 million people. NATO member since 1952. Customs union with the EU since 1996. Strategically positioned at the intersection of Europe, the Middle East, and Central Asia — what Ankara calls “the centre of the world.”

It is also the single best natural experiment in heterodox monetary policy that EM investors will ever get to study. From 2021 to 2023, Turkey tried something almost no modern central bank has attempted: cutting interest rates aggressively while inflation was accelerating. The outcome was predictable to everyone except, apparently, the man in the Presidential Palace.

The lira (TRY) lost over 70% of its value against the US dollar between 2020 and 2023. From approximately 7 TRY/USD in early 2020 to 29 TRY/USD by mid-2023. Savings evaporated. Import costs exploded. Ordinary Turks found creative ways to preserve purchasing power — including, significantly, cryptocurrency.

Then the policy reversed. And the recovery, while painful, is actually working.

The textbook says: when inflation rises, raise interest rates. Higher rates attract capital, strengthen the currency, reduce domestic demand, and cool price pressures. This is orthodoxy. Every IMF programme, every central bank playbook, every economics 101 curriculum says some version of this.

Recep Tayyip Erdoğan said the textbook was wrong.

He repeatedly replaced Central Bank of the Republic of Turkey (CBRT) governors who disagreed with him. Between 2019 and 2022, Turkey went through four central bank governors. Each was replaced when they refused to cut rates, attempted to raise rates, or communicated hawkish signals that Erdoğan disapproved of.

The policy rationale — articulated publicly by Erdoğan multiple times — was that high interest rates cause inflation by raising business costs, which businesses pass on to consumers as higher prices. There is a heterodox school of thought that partially supports this “cost-push” view of inflation. Most mainstream economists believe it is true only in very specific circumstances and categorically false during broad demand-side inflation. Turkey in 2021–2022 was experiencing broad demand-side inflation. The policy made things significantly worse.

By October 2022, with inflation at 85.5%, the TRY at 18.6/USD (from 8.5/USD a year prior), and foreign exchange reserves critically depleted, the experiment had run its course.

May 2023. Elections. Erdoğan won. Then, immediately after securing his electoral mandate, he appointed Mehmet Şimşek as Finance Minister.

This was not a subtle signal. Şimşek is a former Merrill Lynch economist and deputy prime minister with a reputation for market credibility and policy orthodoxy. His appointment was Erdoğan’s way of telling investors: the experiment is over. We are returning to conventional policy.

Within weeks, Hafize Gaye Erkan was appointed CBRT Governor — the first woman to hold the role. When she resigned after a brief, controversy-clouded tenure, she was replaced by Fatih Karahan, a Princeton-educated economist who had spent years at the Federal Reserve Bank of New York. The signaling was deliberate: Turkey’s central bank would now be run by credentialed, internationally respected technocrats.

The rate hikes followed. The CBRT raised its policy rate from 8.5% in May 2023 to 50% by March 2024 — a 41.5 percentage point increase in under a year. To put that in context: when the US Federal Reserve hiked aggressively in 2022–2023, its total increase was 5.25 percentage points. Turkey did eight times that in the same timeframe.

The policy medicine was brutal. 50% interest rates mean Turkish banks were lending at 60%+. Mortgages became effectively inaccessible. Consumer credit dried up. Business investment contracted. GDP growth slowed sharply.

But it’s working.

Turkish CPI peaked at 85.5% in October 2022, briefly declined, then climbed back to approximately 75% in May 2024 as the rate hike cycle lagged inflation dynamics. By early 2026, TurkStat (Turkish Statistical Institute) data shows inflation in the 40–45% range — still extremely high by any G20 standard, but directionally declining.

The TRY stabilized. From approximately 32 TRY/USD in early 2024, it moved to around 34–36 TRY/USD by 2026 — a managed, gradual depreciation rather than the disorderly plunge of 2021–2023. This is a significant change: traders can now model TRY depreciation as roughly predictable inflation differential, not as a source of binary blow-up risk.

Turkey’s current account deficit — which was the underlying driver of TRY weakness (Turkey imports far more than it exports) — narrowed from -5.5% of GDP in 2022 to approximately -2.5% in 2024 as higher rates suppressed domestic demand and therefore import volumes.

Foreign exchange reserves, which had been depleted to dangerously low levels (and were being masked through swap arrangements with Qatari and other central banks), have partially recovered. Gross reserves are now approximately US$140 billion, though net reserves (subtracting swap obligations) remain contested.

Here is the detail that the mainstream EM analysis typically omits: Turkey has one of the highest cryptocurrency adoption rates in the world.

Chainalysis has placed Turkey in its Top 10 for crypto adoption by consumer usage for three consecutive years (2022, 2023, 2024 Global Crypto Adoption Index). The reason is not ideology. It is survival.

When the TRY was losing 40–50% annually, ordinary Turkish citizens needed an accessible, non-bank vehicle to preserve purchasing power. They found USDT (Tether) — a stablecoin pegged to the USD — particularly useful. Binance, Crypto.com, and local Turkish exchanges (Paribu, BtcTürk) reported massive volume increases during the 2021–2023 inflation crisis. Turkish trading volumes in USDT at peak exceeded most comparable economies.

The 50% rate environment has somewhat reduced the urgency. If you can get 50% in a Turkish bank account, you’ll think twice before putting savings into USDT. But the behavioral pattern has been established: Turkish retail investors now have cryptocurrency fluency that most EM markets lack, and that fluency will likely persist even as inflation moderates.

The Turkish government recognized this. In 2024, Turkey passed new cryptocurrency regulation under the Capital Markets Board (CMB), bringing exchanges under formal oversight, imposing AML requirements, and integrating crypto reporting into the tax code. This is the predictable follow-on: countries with mass crypto adoption eventually regulate it, which institutionalizes it.

The orthodox restoration bears watching, not celebrating.

Inflation at 40–45% is still enormously damaging to real purchasing power and business planning. A Turkish manufacturer signing a 12-month supply contract must price in 40% annual inflation — making any fixed-price agreement essentially unworkable. This is not a healed economy. It is an economy that has stabilized after a severe self-inflicted wound.

The structural current account deficit has not been resolved — it has been suppressed by high rates. When rates eventually come down (which they must, because 50% rates cannot coexist with sustained economic growth), import demand will rebound, the TRY will face renewed pressure, and the inflation cycle could reinitiate if not managed carefully.

Erdoğan remains in power. The institutional independence that Şimşek’s appointment signals is real but entirely dependent on continued presidential backing. If Şimşek is replaced, or if political pressure mounts for pre-election stimulus in advance of the 2028 elections, the experiment could restart.

Turkey accessible via TUR — the iShares MSCI Turkey ETF (NYSE Arca). The fund had one of the worst five-year return histories of any single-country ETF through 2023, then staged a significant recovery in 2024 as the policy shift became legible. TER 0.59%.

The Turkey trade post-2023 is effectively a bet on the Şimşek policy regime persisting. If you believe Erdoğan will let technocrats run economic policy through 2026–2027, Turkish equities offer cheap valuations (JSE P/E comparison: JSE trades at ~12x; Istanbul BIST-100 at ~7x earnings, though currency volatility adjustments are critical).

For investors watching the EM playbook broadly: Turkey’s experience is the clearest modern data point on why central bank independence matters. The damage of 2021–2023 was not inevitable — it was chosen. The recovery is real but expensive in human terms.

The CBRT will eventually have to cut rates. At 50%, the policy rate is explicitly deflationary — squeezing credit, suppressing growth, and maintaining lira attractiveness primarily through brutal carry. The question is timing and credibility.

Şimşek has stated publicly that rate cuts will only begin when inflation is clearly on a sustained downward path, not merely declining month-to-month. The CBRT’s own inflation target is 5% — meaning at 40–45% CPI, Turkey is still eight to nine percentage points from policy normalisation even in a perfect scenario.

The 2026 scenario: if TurkStat confirms CPI declining toward 30% by year-end 2026, the CBRT begins a rate cut cycle. Markets pre-price this. TRY strengthens modestly. Turkish equities re-rate upward. The carry trade — borrowing in low-rate currencies to invest in TRY assets yielding 50% — unwinds in an orderly rather than disorderly fashion.

That is the bull case. The bear case involves political interference, a premature rate cut cycle, and a replay of 2021.

Turkey has taught every EM investor the same lesson twice in a decade. The central bank is either the economy’s anchor or its wrecking ball. There is no middle ground.