Güldem Atabay: Rate Hikes Are Prozac for Markets, But Toxic for the Real Economy

Budget Performance Falls Short of Disinflation Goals

Turkey’s April budget deficit came in at 174.7 billion TL, nearly unchanged from the same month last year. This kept the 12-month rolling budget gap steady at 2.3 trillion TL. The most striking improvement was in the primary balance, which swung from a 63.8 billion TL deficit in April 2024 to an 85.9 billion TL surplus in April 2025, narrowing the 12-month primary deficit from 820 billion TL to 670 billion TL.

Economist-commentator Guldem Atabay

However, soaring interest payments remain a critical concern. As post-election rate hikes gained traction, interest expenditures in the first four months of 2025 rose to 724.6 billion TL, compared to 364.5 billion TL a year earlier. This pushed the 12-month cumulative interest burden to 1.63 trillion TL, the highest share in total expenditures since 2015.

While rate cuts could gradually ease this burden, any premature U-turns in monetary policy risk triggering a boomerang effect, potentially worsening inflation and debt dynamics.

Despite official promises of “fiscal discipline supporting disinflation,” the budget performance of early 2025 paints a contradictory picture. Weakening growth following the March 19 political crisis and rising borrowing costs make the government’s deficit-to-GDP target of 3.5% increasingly unrealistic.

Balance of Payments: The Imamoğlu Shock

In March, Turkey’s current account deficit stood at $4.1 billion, with the 12-month rolling gap flat at $12.6 billion. Rising energy imports were offset by improvements in other categories. Energy imports alone rose by $0.6 billion to hit $49.3 billion annually.

On the positive side, the core current account balance posted a $1.5 billion monthly surplus, pushing the 12-month figure to $51.6 billion.

However, the real stress lies on the financing side. In March, $7.1 billion in portfolio outflows were recorded—attributed largely to investor anxiety following the imprisonment of Istanbul Mayor Ekrem İmamoğlu. An additional $3.9 billion left under the opaque “net errors and omissions” category.

Together, these outflows were covered by a staggering $15.2 billion in central bank reserves, creating a gaping hole in Turkey’s FX buffer.

Housing Market Defies Gravity—For Now

Despite mortgage rates hovering around 3% monthly, April recorded the highest home sales in the past four months. A total of 118,359 units were sold—56.6% higher than the previous year. January–April sales were up 27.9% year-on-year, hitting 454,145 units.

The drivers?

1. Real price corrections in the housing market.

2. Expectations that rates have peaked, prompting buyers to act before prices rise again.

These factors suggest the housing market may be bottoming out, even before the Central Bank’s expected rate cuts starting July.

CBRT Survey: Expectations Deteriorating

Political uncertainty continues to erode confidence. According to the CBRT’s latest survey:

• Year-end inflation expectations rose from 29.98% to 30.35%.

• 12-month ahead CPI forecast dropped slightly to 25.06%.

• 24-month projection inched up to 17.77%.

Despite this, market participants still anticipate rate cuts over the summer. The expected policy rate by end-July is 42.96%, down from 49.00% currently. Meanwhile, the year-end USD/TRY forecast rose from 43.60 to 43.70, and the 12-month outlook moved up to 46.62.

Markets Normalize, But Foreign Interest Wanes

Data from the week of May 9 shows some stabilization following the March shock. FX deposits by residents fell by $0.7 billion, including $0.5 billion from households, marking a cumulative $1.7 billion drop over three weeks.

Though the central bank sold a record $55 billion in just 1.5 months, its reserve depletion has now halted, and modest reaccumulation has begun.

Capital inflows, however, remain underwhelming:

• $0.1 billion in equities

• $0.9 billion in domestic bonds

• But $0.3 billion outflow from Eurobonds

Foreign ownership of Turkish bonds dropped below 8%, down from 14.1% on March 14 and far from the 2014 peak of 46%.

On a positive note, the share of FX-protected deposits (KKM) in total deposits fell to 2.9%, while FX+KKM combined dropped to 42.3%. Turkish lira deposits now make up 57.7%, reflecting both high interest rates and de-dollarization trends—at least for now.

Real Economy Suffers as Politics Collide With Policy

While tighter policy has reassured markets, it’s causing growing pain in the real sector. Istanbul Chamber of Industry President Erdal Bahçıvan criticized the government for eroding precious reserves and warned of mounting distress in production.

Even AKP Deputy Chairman Nihat Zeybekci voiced concern, advocating for supply-side solutions to inflation and implicitly questioning Treasury Minister Şimşek’s policy longevity—despite the recent London investor roadshow.

At the EBRD conference in London, CBRT Deputy Governor Cevdet Akçay stressed the need for sustained tight monetary policy, arguing that inflation expectations must align with pricing behavior to avoid deeper turmoil.

Erdogan Between Imamoğlu and the Economy

The underlying theme is clear: President Erdoğan is stuck between keeping İmamoğlu behind bars—a move likely coordinated with U.S. political backing—and containing the growing backlash from Turkey’s business elite.

With inflation still high, growth faltering, and political risks increasing, the government faces a difficult trade-off between market stabilization and economic recovery. Rate hikes may calm the headlines, but for Turkey’s industrial base, they’re increasingly proving to be more poison than cure.

IMPORTANT DISCLOSURE:

PA Turkey intends to inform Turkey watchers with diverse views and opinions. Articles in our website may not necessarily represent the view of our editorial board or count as endorsement.

Follow our English language YouTube videos @ REAL TURKEY: https://www.youtube.com/channel/UCKpFJB4GFiNkhmpVZQ_d9Rg
And content at Twitter: @AtillaEng
Facebook: Real Turkey Channel: https://www.facebook.com/realturkeychannel/