The Impact of Inflation on The Real Return on Equity in the Turkish Banking Sector: An ARDL Approach

This study examines the impact of inflation on the real return on equity (RROE) in the Turkish banking sector, emphasizing the sector’s ability to sustain real profitability under inflationary conditions. Using quarterly data from 2005 to 2024, the analysis employs the Autoregressive Distributed Lag (ARDL) model, Bounds Testing, and the Error Correction Model (ECM) to capture both short- and long-run dynamics. The results reveal a statistically significant and negative relationship between inflation and RROE, suggesting that rising inflation erodes real profitability. The inverse relationship between inflation and RROE is primarily driven by the sector’s inability to adjust its net interest margin in line with rising nominal deposit and loan rates. By focusing on real profitability rather than nominal indicators, this study offers a more accurate and policy-relevant perspective on bank performance under macroeconomic stress.