Experts suggest that current restrictive monetary policies have not sufficiently curbed inflation due to a lack of support from structural and fiscal policies, compounded by dialog challenges that undermine the policies’ effectiveness.

Household spending from 2021 to 2023 surged to levels three to four times above normal, primarily fueled by accommodative monetary policies. These policies drove inflation thru exchange rates and reserve effects, considerably impacting the housing sector. Central Bank economists have published research highlighting the effects of attractive housing loan campaigns in the late 2010s and during the coronavirus pandemic. those who purchased homes benefited from low interest rates as inflation rose, effectively reducing their monthly payments as nominal incomes increased.

The Impact of Past Monetary Policy on Current Consumption

Calculations by CBRT economists indicate that for a typical household, mortgage payments taken in 2016 initially accounted for 50 percent of their income but decreased to 5 percent by 2024 due to inflation. This reduction freed up cash flow for additional spending, increasing household consumption. This “reserve effect” boosted consumption expenditures by up to 6.9 percent in 2024. Despite the tightening of monetary policy starting in June 2023, the lingering effects of past policies continued to drive consumption, diminishing the impact of current anti-inflationary measures. Rising loan interest rates coupled with soaring housing prices have also disincentivized saving, further fueling consumption, especially in the service sector. These factors contribute to the slow pace of inflation reduction despite strict monetary policies.

“Why should I save money? Inflation has switched to the mode of the money in my hand without lowering the purchase power.”

Sectoral Impacts: Industry Feels the Chill

The industrial sector is experiencing a slowdown, while demand for services remains strong. construction activity is primarily driven by earthquake recovery and urban renewal projects rather than new developments.The manufacturing industry’s capacity utilization rate in August has fallen to a five-year low. there are disparities among sub-sectors, with some operating near 85 percent capacity and others below 65 percent. Notably, the manufacture of motor vehicles, trailers, and semi-trailers has slowed significantly. This decline in the automotive sector, a key driver of production and exports, is particularly concerning.

The automotive industry is undergoing a global conversion, presenting an prospect to increase Türkiye‘s role in global supply chains. New investments are needed to participate in international production projects, modernize spare parts production, and enhance the value of both final products and intermediate goods. Additionally, efforts to make Togg competitive in the domestic market must continue. The industrial sector faces significant global changes, prompting countries to prioritize it. While supporting the sector unconditionally may not be feasible during financial tightening and inflation reduction, targeted interventions are necesary to capitalize on global opportunities.