Heightened political tensions around mid-March, linked to legal actions against prominent political figures, acted as a catalyst for a sharp policy shift, according to Demiralp. The Central Bank of the Republic of Turkey (CBRT) responded with significant interest rate hikes, effectively ending an easing cycle initiated last December and bringing the policy rate back towards levels seen previously. This aggressive tightening, culminating in the policy rate reaching nearly 50% after successive increases, came at a considerable cost. Demiralp estimates around $50 billion depletion from the bank's net reserves (excluding swaps) in roughly a month, underscoring a crisis of confidence and rising dollarization as the bank intervened to stabilize the lira.
This erosion of confidence is mirrored in household behavior, as indicated by a Koç University survey cited in the analysis. While overall savings rates increased following the political crisis, there was a 13% jump in the preference for holding foreign currency in April compared to March. The traditional safe-haven asset, gold, also remained popular for savers. Simultaneously, an 8% increase in Turkish Lira deposit holdings suggests the higher interest rates have successfully curbed capital flight, attracting savers seeking both yield and perceived safety amidst rising risks.
A critical question, Demiralp posits, is whether the Turkish economy can withstand what she terms a second "bitter pill" of austerity. The rate cuts initiated last December appeared less driven by an improving inflation outlook – which was already viewed by many analysts as overly optimistic, with revisions expected even before the March turmoil – and more by a desire to alleviate pressure on the real economy. With official annual inflation at 38.1% in March (according to TÜİK, while independent group ENAG reported 75.2%) and inflation expectations deteriorating, the return to tighter monetary policy, while necessary for stability, renews concerns about an economic slowdown.
Signs of strain are already apparent in the real economy. Demiralp highlights a surge in concordato (bankruptcy protection) filings: the 583 filings made in the first quarter of 2025 already represent roughly one-third of the 1,723 filings recorded for all of 2024. Furthermore, while still relatively low by global standards, the non-performing loan ratio for consumer credit is trending upwards, approaching the 3.5-4% range. The banking sector also faces renewed pressure on profit margins due to the higher interest rate environment impacting lending and borrowing costs.
External dynamics add another layer of complexity. Potential global recession risks, exacerbated by factors like US trade policy uncertainties, could negatively impact Turkey's crucial export markets. However, Demiralp notes potential counterbalances: falling global energy prices and a weaker US dollar could relieve the Turkish economy's import bill and competitiveness.
Despite these significant headwinds, Demiralp views a severe "hard landing" scenario as a remote possibility. However, the economic outlook has dimmed. Based on the analysis context, the year-end inflation forecast is now more likely to align with previously considered pessimistic scenarios (around 36% for 2025 year-end), and growth expectations have been revised downwards. While positive growth, perhaps around 2% for 2025, still seems achievable, Demiralp suggests this might be better described not as a soft landing but perhaps more accurately as a "soft stagnation" or a "gentle stall," reflecting an economy struggling to gain momentum amidst tight policy and lingering uncertainty.