Turkey’s inflation crisis rages a year into economic turnaround

Half an hour before midday on a sunny morning in Istanbul, dozens of people queued at an eatery bearing a logo of a heart bobbing in a bowl.

A chalkboard touted the menu: tomato soup and green bean and meat stew, with a pastry. The kent lokantası, a type of eaterie subsidised by the city, filled up moments after its doors opened at 12pm.

“This place is not just for the jobless or the destitute . . . elsewhere I would have to pay TL200 ($6.25) for a meal that costs TL40 here,” said Hasan, a 53-year-old deliveryman who eats there every day.

Hüseyin, a 67-year-old retiree, said he would struggle if it were not for the kent lokantası: “I cannot afford fresh fruit or meat. Prices change every time I go to the market,” he said.

Istanbul’s 14 kent lokantası each serve around 1,000 meals priced at TL40 every day, said Erdal Celal Aksoy, the city’s deputy general secretary. The municipality subsidises the food cost by two-thirds, he said. The restaurants were introduced in 2022 amid a long-running inflation crisis as inflation reached a peak above 85 per cent. But two years later, demand is still so strong that Istanbul plans to open another two dozen outlets.

The popularity of the kent lokantası underscores 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 increased its main interest rate to 50 per cent from 8.5 per cent since the economic overhaul, led by finance minister Mehmet Şimşek, kicked off 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 per cent.

The government has also boosted taxes and signalled that it would not lift the minimum wage again this year following a 49 per cent rise in January. It pledged last week to cut public spending on everything from foreign cars for the government fleet to construction of new government buildings.

Line chart of Maximum monthly interest rate on lira-denominated transactions (%) showing Credit card borrowing costs have soared for Turkish consumers

Erdoğan’s programme has drawn accolades from investors. But it has yet to pay dividends for Turks, who face inflation of nearly 70 per cent, surging borrowing costs and a reduction in the stimulus measures that in recent years dulled the impact of price growth.

“It is a bitter medicine,” said Selva Demiralp, a former US Federal Reserve economist now working at Koç University in Istanbul. Pensioners and those on low incomes were “going to pay for the fight against inflation the most”, she added.

Şimşek’s goal is to quell a long-running inflation crisis triggered by Erdoğan’s former policies, which centred on a failed wager that low interest rates would cure rather than cause high inflation.

Erdoğan pledged earlier this month that there would be “no turning back” from the new plan, signalling the government would not provide “temporary relief” as it had in the past, including the huge handouts before his re-election in May 2023.

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

The situation at grocery stores and shopping malls has yet to reflect this improving picture, however. A butcher in Istanbul’s working-class district of Fatih sells ground beef for TL640 a kilo, about double what it cost a year ago. “Our customers have fallen to a trickle. Those who come buy a half-kilo or 250 grammes, when they used to buy a kilo, just to give their kids a bit of 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 labour unions last month at TL17,725 a month for a family of four, climbed above the minimum wage of about TL17,000 in April. “The working poor . . . cannot meet basic needs of nutrition, shelter, health and transportation,” she said.

Line chart showing 12-month inflation expectations in Turkey

Many consumers remain doubtful the new economic measures will succeed, having watched 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 dealt Erdoğan’s ruling Justice and Development party its biggest defeat since its founding two decades ago.

“Inflation expectations are persistent because of the credibility erosion of the past years. Financial markets seem to partly buy the disinflation story but it is more challenging when it comes to expectations of households and small enterprises,” said Hakan Kara, a professor at Bilkent University, who was previously a Turkish central bank chief economist.

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

Chart showing Turkey's central bank inflation forecasts

Those expectations are a key challenge for the central bank in reining in price growth, 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 terms of monetary and fiscal policy, for the central bank to achieve its goal. Central bank forecasts earlier in May suggested the year-end economic growth rate would be roughly 2.1 per cent, much faster than estimates released in February.

“Growth has to slow much more to bring inflation to the desired path,” Kara said, adding: “The main question is whether authorities will be patient enough to withstand the political consequences of this bitter stabilisation process.”

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