The Turkish government’s borrowing costs have drastically increased amid spiraling inflation, with the treasury’s interest liabilities reaching 1.75 trillion Turkish liras ($120 billion) in April to outstrip its principal debt stock of 1.48 trillion liras.

As Al-Monitor reported earlier this month, the inflation surge in Turkey has led to daunting income transfers to the detriment of the wage-earning masses, with banks emerging as a chief beneficiary of Ankara’s controversial economic policies. Banks made net period profits of 39 billion liras in the first two months of the year, a 323% increase from 9.2 billion liras in the same period in 2021. Those whopping profits owe mainly to a government bond pegged to the consumer price index (CPI), one of the treasury’s three lira-denominated bond types, along with other domestic borrowing instruments based on hard currency and gold.

The CPI-indexed bonds, which account for 23% of the treasury’s borrowing means, have placed the heaviest burden on public finances due to the sharp spike in consumer inflation this year. The corresponding increase in the yields of CPI-indexed bonds has been the main driver of the threefold increase in bank profits over a year.

Lying at the core of those financial woes is President Recep Tayyip Erdogan’s fixation on the idea that high interest rates cause high inflation — the opposite of what mainstream economic theory holds. Under pressure from Erdogan, the Central Bank began lowering its policy rate in September despite rising inflation. The cuts totaled 500 basis points in four months, bringing the bank’s policy rate to 14% and pushing real yields deep into negative territory. The controversial policy sparked a rush for hard currency as Turks scrambled to protect the value of their savings. The tumbling lira further fueled inflation and the banks’ profits from CPI-indexed bonds rose.

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Written by Mustafa Sönmez