Why Turkey’s interest rate is 17%! Why investors should not wish for high rates!

Published: January 6, 2021 at 6:10 pm

Every time the RBI lowers interest rates, we see many investors complain. In this article, Harshini explains why a high-interest rate is not healthy for our finances by taking Turkey’s example, where interest rates were recently increased to 17%!

Older readers may recall when EPF and PPF rates were as high as 12% in the 90s. Many investors wish to go back to that time, not realising the rate was high because the Indian govt was battling bankruptcy. Stock market followers may recall that the sharpest drop in interest rates triggered the bull run in the 2000s.

About the author: Harshini Gopu works in a global financial institution as a senior associate. She is experienced in credit risk and capital management. Her financial blog is Learnfineasy. She is also a budding artist. Also by Harshini: Factors that determine your CIBIL score and how to improve it and Interest Rate Swaps: A way for MFs to reduce interest rate risk and Now everyone can get an income-tax exemption for payment of deemed LTC fare.

Recently we may have noticed that Turkeys central bank recently hike interest rate to 17% They have also hinted towards a tighter monetary policy to control the rising double-digit inflation. Another thing to be noted is Turkey’s Currency Lira has lost 50% of the value since 2018.

Let us understand Turkey’s problems to understand the interest rate hike by the central bank and why the Lira value is lost drastically. 


When did Turkey’s problem first start to appear? Turkey had a rapid growth (Average rate 7-8%) from 2002 to 2012, making it one of the fastest-growing economies in the G20 countries. But this rapid growth resulted in the unbalanced growth driven mainly due to Capital accumulation. Rapid foreign capital inflows were used to finance the construction activities in the country. Majority of the capital accumulation was financed through foreign Debt as the country had access to the cheap credit in the world of cheap interest rate during that period.

In all developed nations, we can find that the Central Bank of the Country will have independence from the Government policy to protect the country’s economic interest.

The Turkish government had access to the Central bank policy and decisions and pressured them to keep the interest rate low, increasing credit. Keeping the interest rate low, the Government thought it might help the local economy borrow more money at a lower interest, but it also led to higher inflation. This is the main reason for the economic crisis of Turkey today.

High inflation is the most important problem in Turkey. It eroded the value of Turkey’s Lira 60% from 2018. The inflation rate is above 15% from 2018, and Turkey’s Central Bank target was around 7 %, whereas other countries’ target is around 2%-4%.  

The problem with high inflation is it can erode the value of the currency. To control inflation, an important key is to increase the rates. If the rates are increased, then the borrowing will come down to that extent, inflation can also be kept in control. But as said earlier, Turkey’s Government favoured keeping the interest rate lower, which kept the inflation increasing in turn, the value of Lira kept on losing its value.

Turkey’s real return after considering any interest and high inflation rates is negative. The negative real return was a huge problem to Turkey as it was dependent on the Foreign inflows. Turkey also continuously spent more import than receiving from the export, which led to the large Current Account Deficit. The problem became worse due to the complete collapse of Tourism due to the Covid pandemic. Tourism was one of the major revenue to the Turkey economy.  

Since the real return of investment is negative, foreign investment will be low, and the two major countries that get affected here are Spain and France, who are the large debt holders of Turkey. They will not invest more when their return on their investment is meagre, and when they are scared, they will not be getting the investment back. 

Due to low foreign investments and the inflow of money reduces, the government started spending from its reserve for the different government programs like subsidies etc. Because of this, the central bank had to increase the money supply in the economy. This will lead to a depreciation of the Lira currency against other currencies in the world. The households of Turkey lost confidence in Lira. They started to exchange with the more stable currency, i.e. Dollars, which made the Lira lose more value rapidly (sold more lira for fewer dollars). The Central Bank and the government steps to improve the situation didn’t come out well since the Household held very less Lira to have any effect.

As a major step to keeping the Lira stable, the Central Bank has bought a major quantity of the Lira in the open market using all its foreign reserves. It has also banned 6 large Currency trading banks temporarily for trading the Lira in the hope of stopping the speculation on its weakening value.  Despite all these things, they are not in favour of Lira.

To keep the high inflation in control, economists worldwide suggest that Turkey has substantially increased its interest rate. Finally, the Central bank has raised the rates by 2%, which may be too little too late but we have to wait and watch the further development regarding the valuation of Lira and High inflation rates. 

The next time RBI decreases interest rates, we must be thankful for having more money to spare, thanks to lower inflation and vice-versa!

Do share if you found this useful

We now publish both equity fund and debt fund (+ hybrid fund) screeners each month!
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video!  More than 415 investors and advisors use this!
Unlock the secrets of successful financial advisors and entrepreneurs with our new course!
My new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parent’s plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Did you know? We have more than 1000+ videos on YouTube to explore! Join our YouTube Community!

Join our courses in exclusive Facebook Groups!

  • 550+ members are now part of our new course: How to get people to pay for your skills! (watch 1st lecture for free). Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show how to achieve by showcasing your skills and building a community that trusts you and pays you!
  • Goal-based portfolio management! Join 2220+ members and get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment of Rs. 3000 only. No recurring fees! Life-long access to videos (10+ hours content)  in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps