Turkey’s inflation crisis is turning a year into an economic turnaround

Half an hour before noon on a sunny morning in Istanbul, dozens of people queued at a restaurant bearing a logo of a heart waving in a bowl.

A blackboard advertised the menu: tomato soup and green bean and meat stew, with a pastry. of kent restauranta sort of city-subsidized restaurant, filled up moments after its doors opened at 12:00 p.m.

“This country is not just for the unemployed or the poor. . . elsewhere I would have to pay 200 TL ($6.25) for a meal that costs 40 TL here,” said Hasan, a 53-year-old delivery man who eats there every day.

Hüseyin, a 67-year-old retiree, said he would fight if it weren’t for kent restaurant: “I can’t afford fresh fruit or meat. The prices change every time I go to the market,” he said.

Istanbul 14 kent restaurant each serves about 1,000 meals at a price of 40 TL each day, said Erdal Celal Aksoy, the city’s deputy general secretary. The municipality subsidizes the cost of food by two thirds, he said. The restaurants were introduced in 2022 amid a long-term inflationary crisis as inflation peaked above 85 percent. But two years later, demand is still so strong that Istanbul plans to open two dozen more outlets.

The popularity of kent restaurant highlights how President Recep Tayyip Erdoğan’s government has struggled to tame runaway inflation a year after it launched a sweeping economic overhaul.

Turkey’s central bank has raised its key interest rate to 50 percent from 8.5 percent since the economic review, led by Finance Minister Mehmet Shimşek, began last June. The maximum monthly interest rate on credit cards, a popular way of borrowing for cash-strapped consumers, has tripled since last June to 4.25 percent.

The government has also raised taxes and signaled it will not raise the minimum wage again this year after a 49 percent increase in January. She pledged last week to cut public spending on everything from foreign cars for the government fleet to the construction of new government buildings.

Erdogan’s program has received praise from investors. But it has yet to pay dividends for Turks, who face inflation of nearly 70 percent, rising borrowing costs and a reduction in stimulus measures that in recent years cushioned the impact of rising prices.

“It’s bitter medicine,” said Selva Demiralp, a former US Federal Reserve economist who now works at Koç University in Istanbul. Pensioners and those on low incomes “would pay more to fight inflation,” she added.

Şimşek’s goal is to quell a long-term inflationary crisis caused by Erdogan’s previous policies, which centered on a failed bet that low interest rates would cure rather than cause high inflation.

Erdogan vowed earlier this month that there would be “no turning back” from the new plan, signaling the government would not offer “temporary relief” as it has done in the past, including handouts of big before his re-election in May 2023.

Turkey’s new program is slowly rebuilding confidence among international fund managers, who have poured almost $10 billion into Turkish stocks and lira-denominated government debt over the past year, central bank data show. S&P Global Ratings and Fitch Ratings have upgraded Turkey’s rating this year, while high rates are cooling credit growth.

However, the situation in grocery stores and malls has yet to reflect this improving picture. A butcher in Istanbul’s working-class Fatih district sells beef for 640 TL a kilo, about double what it cost a year ago. “Our customers have fallen into a flux. Those who come buy half a kilogram or 250 grams, when they used to buy a kilogram, just to give the children some protein”, said shopkeeper Ekrem.

Hacer Foggo, founder of the Deep Poverty Network, a research group, said Turkey risked a “poverty spiral” as the hunger threshold, estimated by unions last month at 17,725 TL a month for a family of four, climbed above the wage minimal. about 17,000 TL in April. “The working poor. . . it cannot meet basic needs for food, shelter, health and transportation,” she said.

Many consumers remain skeptical that the new economic measures will succeed, having seen the central bank miss its inflation target every year since 2011. Voters rebelled against the long-running inflation crisis in local elections this March, which gave Erdogan’s ruling Justice and Development party its largest. defeat since its establishment two decades ago.

“Inflation expectations are persistent due to the erosion of credibility in recent years. “Financial markets appear to be partially buying the disinflation story, but it is more challenging when it comes to the expectations of households and small enterprises,” said Hakan Kara, a professor at Bilkent University who was previously a chief economist at the Turkish central bank.

Turkey’s central bank said earlier this month that it expected the annual inflation rate to fall to 38 percent by the end of the year, after peaking at around 75 percent this month. But a central bank survey shows consumers predict the rate will reach 80 percent within a year. More than 90 percent of consumers in a separate Koç University study said now was a good time to buy long-term goods, a sign they believed prices would continue to rise.

Those expectations are a key challenge for the central bank in curbing rising prices, as they cause demand to be pulled forward, contributing to the spiral of ever-higher prices, economists say.

Demiralp said that “the current level of tightening is not enough”, both in monetary and fiscal terms, for the central bank to achieve its objective. The central bank’s forecasts in early May suggested that the economic growth rate at the end of the year would be around 2.1 percent, much faster than estimates published in February.

“Growth needs to slow down much more to bring inflation back on track,” Kara said, adding: “The key question is whether the authorities will be patient enough to weather the political fallout from this bitter stabilization process.”