The Turkish lira hit an all-time low against the Euro and the US dollar, trading at nearly 44 lira for one euro and 39 lira for one dollar. Erratic monetary policy, political instability, and external debt burdens pushed the Turkish currency into a multi-year rout.
This latest collapse in the Lira happened despite aggressive efforts by Turkey’s central bank to bolster the currency. In April, the central bank raised interest rates from 42.5% to 46% to stem capital outflows—a move that, according to ING, was against the consensus.
Political unrest has dampened investor confidence. Turkish authorities arrested a key opposition leader, Istanbul’s Mayor Ekrem Imamoglu, in March. This sparked protests and concerns that government policy would once again destabilize the Turkish economy.
Instead of calming markets, the central bank’s monetary tightening has had the opposite effect.
“We believe that the central bank’s attempt to manage the exchange rate through tiered interest rate instruments and FX interventions is having the opposite effect, damaging rather than strengthening confidence,” Commerzbank FX analyst Tatha Ghose said in a note.
Turkish Inflation Remains Highest in G-20
Investors had been emboldened by Turkish pledges of monetary orthodoxy and lower inflation, a policy shift that started in June 2023. President Recep Tayyip Erdogan had favored low borrowing costs to boost growth, despite high inflation that crippled household spending power.
Inflation in Turkey accelerated to a record annual high of 85.5% in October 2022 and has remained persistently high since then at above 37%. Turkey reported inflation of 37.86% in April this year, according to the country’s statistical authority.
Euro Area inflation slowed to 2.2% in April 2025, stable compared to March. A year earlier, the rate was 2.4%. It has the highest inflation among G-20 countries.
Efforts to Ease Investors’ Worries Fail to Buoy Lira
Efforts to ease investors’ concerns have failed to support the Lira. The central bank set an asymmetrical interest rate corridor, setting the overnight lending rate at 49% and the overnight borrowing rate at 44.5%, ING said.
“The re-introduction of the ‘rate corridor’, a distortive and opaque system which had been previously abandoned, is a major point of criticism,” Ghose wrote.
“This move, coupled with ad hoc FX interventions, and recent re-introduction of soft capital controls such as forced sale of FX by exporters, signal a retreat from clear, transparent, and rule-based conventional policies.”
Over the past month, the euro and the British pound have gained more than 6% and 4% respectively.
IMF Has a Bleak Economic Outlook for Turkey
Before Turkey’s latest currency decline, the International Monetary Fund had projected that inflation would ease to 33% in 2025.
Turkey’s 12-month current account deficit has reached $12.8 billion. Net FX reserves have plunged to negative $51.8 billion. A surge in interest payments and widening fiscal deficits has only added to the strain.
Social inequality is widening too, with 78% of bank deposits held by the top 1% and credit card debt up 53% year-on-year. Economists now warn that early signs of a banking crisis are beginning to emerge.
“Interest rates impact small and medium-sized businesses the most. Aside from them, consumer loans rose 170 percent last year,” economist Dr.Cüneyt Akman said. “They pay enormous interest. If this continues, citizens will go bankrupt.”
EBRD Lowers Forecast for Turkish Growth
The European Bank for Reconstruction and Development (EBRD) revised on May 13 its forecast for Turkey’s economic growth to 2.8% from 3% in February. It cited lower domestic and external demand and tighter-than-expected monetary policy.
“Turkey’s downward revision reflects expectations of tighter domestic financial conditions as heightened uncertainty weighs on domestic demand,” EBRD said. “Downside risks stem from still-high inflation and the impact of tighter-for-longer global financial conditions on Turkey’s substantial short-term external financing needs.”
The roots of the crisis lie in Turkey’s structural imbalances. These problems include prolonged FX-denominated corporate debt, an overleveraged housing market, and a credit system based on artificially low interest rates. Erdogan’s persistent interference in central bank policy and reliance on populist spending to shore up political support have worsened the situation.
Dismantling of the Kurdish Separatist Group PKK, which ended the 40-year conflict in the country’s southeast, presents a rare positive catalyst for the country. “We have wasted almost $1.8 trillion in the past five decades combating terror,” Treasury and Finance Minister Mehmet Simsek said during a panel at the Qatar Economic Forum in Doha.
India Severs Ties with Turkey over Pakistan Support
Geopolitical tensions have also undermined investor confidence in Ankara. For its revision, the EBRD cited international “policy uncertainty.”
India has started severing ties with Turkey after Erdogan backed Pakistan during the recent Pahalgam terrorist attack. This geopolitical rift will threaten vital sectors of the Turkish economy, including defense, education, aviation, and tourism.
India has historically been a significant trading partner, exporting $5.2 billion worth of goods to Turkey between April 2024 and February 2025. Imports from Turkey totaled $2.84 billion during the same period. Turkey is one of India’s top suppliers of apples and marble—two sectors now facing mass boycotts by Indian traders.
Indian traders and officials argue that economic relations cannot be maintained with a country actively supporting “state-sponsored terrorism.” Deputy Chief Minister Devendra Fadnavis publicly praised Indian traders for boycotting Turkish imports in the wake of Ankara’s pro-Pakistan stance.
Indian universities such as JNU and Jamia Millia Islamia have terminated all academic ties with Turkish institutions.
India Calls to Boycott Turkish Airlines
Calls to boycott Turkish Airlines, which operates 56 weekly flights to India, have grown louder. Travel cancellations from Indian tourists to Turkey have surged by 250%, with online platforms like MakeMyTrip and EaseMyTrip suspending bookings.
EaseMyTrip’s founder and chairman, Nishant Pitti, speaking to Business Today, said that nearly 300,000 Indians visited Turkey last year. He supported the boycott, pointing to Greece and Armenia as alternative destinations for Turkey and Azerbaijan.
Turkish Airlines TKHVY has fallen around 7.7% over the last month, but remains up around 1% year-to-date. The number of foreign visitors to Turkey plunged 13.1% year-on-year to 2.35 million in March 2025, extending the 5.34% decline in the previous month.
“When nations openly support Pakistan, should we fuel their tourism and their economies?” Pitti said.
Disclaimer:
Any opinions expressed in this article are not to be considered investment advice and are solely those of the authors. European Capital Insights is not responsible for any financial decisions made based on the contents of this article. Readers may use this article for information and educational purposes only.
This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.