Treasury Explains January Interest Spike: Not Rate Hikes, But Inflation-Linked Debt

Türkiye’s Ministry of Treasury and Finance has pushed back against claims that January 2026’s sharp rise in government interest payments was caused by recent rate hikes or a sudden spike in borrowing costs.

In a detailed statement, the ministry clarified that the elevated figure primarily reflects inflation-indexed government bonds issued a decade ago, rather than the current monetary tightening cycle.

The explanation comes after public debate intensified over whether high policy rates were driving unsustainable pressure on public finances.

Over Half of January’s Payment Came From Inflation-Indexed Bonds

According to the ministry, 53% of the interest payment made in January was linked to inflation adjustments accumulated on 10-year CPI-indexed domestic government bonds first issued ten years ago.

“The high interest payment recorded in January does not stem from a sudden rise in borrowing costs or from interest rate increases during the current program period. Fifty-three percent of the interest payment made in January consists of inflation differences paid at maturity on CPI-indexed domestic government bonds first issued ten years ago.”

Inflation-linked bonds are structured differently from standard fixed-rate instruments. While they typically offer lower coupon rates, the principal value is adjusted annually based on the realized inflation rate. The accumulated inflation difference is paid in a lump sum upon bond maturity.

A Technical Reflection of Past Inflation

The ministry emphasized that January’s spike should not be interpreted as a sign of deteriorating fiscal discipline, but rather as a mechanical outcome of past inflation dynamics.

“The accumulated inflation difference is paid in a lump sum at maturity. Therefore, during periods when inflation is high, payments on bonds maturing may temporarily appear elevated. The increase in January does not point to a sudden rise in current interest rates, but rather reflects past inflation dynamics materializing through the bond maturity structure.”

Officials added:

“This increase does not arise from a structural change in the interest burden, but from the technical and accounting reflection of inflation accumulated in previous years.”

Türkiye experienced significantly elevated inflation in recent years. As inflation-adjusted bonds reached maturity, the accumulated price increases embedded in those securities became payable, temporarily pushing up headline interest expenditure figures.

No Structural Deterioration in Debt Metrics

To support its argument, the ministry shared forward-looking fiscal projections.

Interest expenditures as a share of GDP averaged 4.4% between 2002 and 2025. That ratio is projected to decline to 3.5% in 2026 and to 3.3% by the end of the Medium-Term Program period.

Similarly, interest expenses as a share of tax revenues, which averaged 25.9% over the same historical period, are expected to fall to 19.9% in 2026 and to 18.3% by the program’s conclusion.

Interest payments as a proportion of total central government expenditures, which have historically averaged 17.7%, are forecast to decrease to 14.5% in 2026 and to 13.9% by the end of the planning horizon.

These projections suggest that authorities do not anticipate a permanent increase in Türkiye’s interest burden, but rather a temporary fluctuation tied to bond maturities.

CPI-Linked Issuance Phased Out

The ministry also highlighted adjustments in public debt strategy. During the current economic program, long-term CPI-indexed bond issuance has been gradually reduced. Since 2024, no new 10-year inflation-indexed bonds have been issued.

This policy shift appears aimed at limiting future exposure to inflation volatility and smoothing debt service patterns over time.

Officials stressed that public borrowing continues to be conducted within a “prudent, predictable and sustainable” framework, taking into account macroeconomic conditions and financial market risks.

Market Implications

The January interest data initially raised concerns that higher policy rates were directly fueling a structural increase in public debt-servicing costs. However, the ministry’s clarification reframes the development as a maturity-driven accounting effect rather than a reflection of current rate policy.