Turkish lira's rocky road: What rate cuts mean for its neighbors

Rudaw Net

3 days ago

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Turkey's central bank has once again surprised the markets. On July 24, it reduced its benchmark interest rate from 46% to 43%, marking a notable turn back to an easing cycle amid persistent inflation and currency volatility. This decision carries significant implications not only for Turkey's domestic economy but also for neighboring regions that are economically intertwined with it, such as the Kurdistan Region.
After a year-long tightening campaign that saw Turkey's interest rate climb sharply to combat inflation and stabilize the Turkish lira, the July rate cut signals that Ankara is shifting strategy. The move comes amid political and economic pressures, but it also reflects an acknowledgment that ultra-high borrowing costs are unsustainable in the long term for Turkey's economy.
The lira, which had already weakened considerably, currently trades at around 40 per US dollar. The trajectory of the currency reflects deep-rooted challenges: stubborn inflation, geopolitical risks, and structural economic issues. Some economists project that the lira will continue to lose value through the rest of 2025.
In an exclusive interview with Rudaw, prominent Turkish economist and writer Mustafa Sonmez cautioned that the lira is likely to decline further in value, citing both domestic and regional risks. 'The Turkish lira is expected to be 44 Turkish lira against the dollar by the end of the year. However, this depends on political developments,' he said.
Sonmez also noted the consequences of policy decisions on capital flows and inflation. 'Yes, lowering interest rates will lead to a shift toward the dollar. This will push up prices, but political risks will also trigger a shift toward foreign currency as a safe haven. This will push prices higher, potentially impacting the Kurdish region,' he said.
Indeed, the shift toward looser monetary policy in Turkey raises several interconnected concerns. Lower rates often encourage borrowing and spending, which can stimulate growth. But in a country already grappling with high inflation, such policies risk further currency devaluation and erosion of purchasing power. The lira's continued decline could drive up the cost of imports, fuel inflation, and complicate the government's efforts to restore investor confidence.
From a regional perspective, this dynamic is also being closely watched. Shukri Jamil, president of the Duhok Chamber of Commerce, told Rudaw: 'Despite the effort by the Turkish government to replace the US dollar with the euro in trade exchange, still 95% of our trade with Turkey is done by US dollar, so the impact of decreasing the interest rate in Turkey and small change in the Turkish lira value would be limited in our bilateral trade. We are more importer rather than exporter.'
Hami Salih, an expert on international trade, noted that in the short term, a weaker lira might benefit Kurdish importers. However, he warned that 'in the long term, it can raise inflation inside Turkey, leading to pricier Turkish goods and commodities that finally damage Kurdish importers.'
He added that investor confidence is also suffering: 'Those Kurdish investors who in the past invested in Turkey's real estate market for the goal of getting Turkish residency or citizenship now are disappointed. The continuous lowering of Turkish lira value has erased the value of the bought residential units. In addition, changes in residency and citizenship laws in Turkey worsened confidence.'
Mustafa Sonmez said that 'Developments in the Middle East, particularly the tension surrounding the new regime in Syria, will impact the dollar's price. Domestically, the tension created by government operations targeting the Republican People's Party poses a risk to the economy.'
Global banks like Goldman Sachs have echoed concerns about the lira's stability. Goldman Sachs predicts that the Turkish lira could weaken to 44.5 per US dollar by the end of 2025, assuming no further rate hikes and continued political uncertainty. JPMorgan also forecasts a gradual depreciation, projecting the lira at 45.2 by early 2026 if inflation returns to near 50%. HSBC analysts have taken a more bearish view, anticipating the lira may reach 46 per US dollar under sustained easing and if foreign reserves are not adequately defended.
These forecasts point to a common theme: policy credibility, political stability, and inflation control are key to restoring trust in the Turkish lira. Without those, the risks of continued depreciation remain high.
Turkey stands at a critical economic juncture. The return to interest rate cuts may ease short-term pressures but risks reigniting inflation and weakening the lira further. As the lira depreciates, the ripple effects are felt not only by Turkish households and businesses but also by traders and investors in the Kurdistan Region and beyond. With the country on the edge of economic rebalancing and political friction, the coming months will test Ankara's ability to manage competing pressures and stabilize its financial landscape.
Omar Ahmed is editor-in-chief of Rudaw's Economy Desk.
The views expressed in this article are those of the author and do not necessarily reflect the position of Rudaw.