Under President Tayyip Erdogan’s urging, Turkey’s central bank lowered interest rates by 500 basis points last year, causing inflation to skyrocket in the last nine months. It’s projected to grow even more, owing to a spike in gas, oil, and grain prices triggered by the Ukraine conflict.
Last year, the easing cycle resulted in a currency crisis, with the lira falling 44% versus the dollar, boosting inflation through imports paid in hard currencies.
The unconventional cutbacks were part of Erdogan’s new economic strategy, which emphasized growth, investment, and exports while keeping interest rates low.
Given Erdogan’s reluctance to high rates, economists predict rate hikes are unlikely, despite extremely negative real yields. Authorities are expected to respond with FX market interventions and fiscal measures to keep the lira steady.
Food and non-alcoholic beverage prices increased by 8.41 percent month over month, while furniture prices increased by 7.00 percent, further eroding household savings.
Transportation prices increased by 76 percent annually, while furniture prices increased by 65 percent, according to data.
According to Jason Tuvey, senior EM economist at Capital Economics, inflation will remain similar to February levels until the end of the year.
“The risks are skewed to the upside due to the spillover effects from the Russia-Ukraine situation, including increased global commodity prices and potentially new supply chain disruptions,” he wrote in a note.
After raising prices across the board at the beginning of the year, the government has imposed tax cuts on basic products and is subsidizing a major portion of electricity bills to help consumers cope.
In January, the central bank predicted that inflation would peak in May, climbing to roughly 55 percent, but Russia’s invasion has raised the threat of even higher inflation.
According to a Turkish official, inflation risks are increasing, and energy prices will continue to exert downward pressure on pricing. “There is a picture in front of us that is straining the economy’s balance. When you factor in the Fed’s upcoming decision, it’s evident that this will be a trying time “According to the official,
Following Russia’s onslaught, the lira fell below 14.0 to the dollar last week, and additional devaluation could put more pressure on prices.
After inflation figures on Thursday, the currency was barely moved at 14.1325 against the dollar at 0808 GMT.
What is Turkey’s inflation rate?
Despite months of assurances from President Recep Tayyip Erdogan that the soaring figures were only temporary and that his government could ease the pain on Turks burdened by rising living costs, Turkey’s annual inflation rate has risen to a 20-year high of 48.7%, according to state data released on Tuesday.
According to the Turkish Statistical Institute, consumer goods prices increased by 11.1 percent in January compared to the previous month, above economists’ forecasts of between 9 and 10%.
Why is inflation at an all-time high?
Even before the war drove price rises, strong consumer spending, steady pay gains, and persistent supply shortages had pushed inflation in the United States to its highest level in four decades. Furthermore, housing expenses have grown substantially, accounting for approximately a third of the government’s consumer price index, a trend that is unlikely to change anytime soon.
“The numbers are staggering, and there’s more to come,” said Eric Winograd, senior economist at AllianceBernstein, an asset management business. “Inflation will reach a far greater peak than previously projected, and it will arrive much later than expected.”
According to a government report released on Thursday, inflation increased by 0.8 percent from January to February, up from 0.6 percent from December to January. So-called core prices rose a strong 0.5 percent month over month and 6.4 percent year over year, excluding the volatile food and energy categories. Core prices are more closely tracked by economists since they reflect longer-term inflation trends.
Inflation is outpacing most Americans’ income gains in the last year, making it more difficult for them to buy basic needs such as food, gas, and rent. As a result, as the midterm elections approach, inflation has emerged as the most serious political threat to President Joe Biden and congressional Democrats. In surveys, small business owners say it’s their top economic issue as well.
The Federal Reserve is expected to raise interest rates many times this year, starting with a quarter-point hike next week, in an effort to slow the rise in inflation. The Fed, on the other hand, confronts a delicate challenge: if it tightens credit too much this year, it risks undermining the economy and possibly causing a recession.
Almost every category of goods and services increased in price from January to February. Other than during a pandemic-induced price surge two years ago, grocery expenditures increased by 1.4 percent, the largest one-month increase since 1990. The price of fruits and vegetables as a whole increased by 2.3 percent, the highest monthly increase since 2010. Gas costs increased by 6.6 percent, while apparel prices increased by 0.7 percent.
What is the cause of Turkey’s economic crisis?
The Turkish currency and debt crisis (Turkish: Trkiye dviz ve bor krizi) is a financial and economic crisis that has been occurring in Turkey since 2018. It is marked by the depreciation of the Turkish lira (TRY), high inflation, increased borrowing prices, and, as a result, rising loan defaults. The Turkish economy’s enormous current account deficit and large quantities of private foreign-currency denominated debt, combined with President Recep Tayyip Erdoan’s growing authoritarianism and unconventional interest rate policies, triggered the crisis. Some analysts also point to the leveraging effects of geopolitical tensions with the US, as well as the Trump administration’s imposition of tariffs on some Turkish imports such as steel and aluminum in 2018.
While the initial stages of the crisis were marked by waves of substantial currency devaluation, subsequent stages were marked by corporate loan defaults and, eventually, a slowdown in economic growth. Stagflation developed as the inflation rate remained in the double digits. The crisis brought an end to a period of overheated economic expansion under Erdoan’s regimes, which was mostly supported by foreign borrowing, easy and cheap credit, and government spending.
Following the replacement of Central Bank chairman Naci Abal with ahap Kavcolu, who lowered interest rates from 19 percent to 14 percent amid the COVID-19 pandemic in 2020 and early 2021, the Turkish lira sank to all-time lows. In the year 2021, the lira lost 44% of its value.
The economic crisis is thought to have lowered Erdoan’s and the AKP’s popularity, as the party lost most of Turkey’s major cities, including Istanbul and Ankara, in municipal elections in 2019.
Why is Turkey such a poor country?
Poverty in rural and urban areas is distinct (3,25). Lack of access to land, human capital, financial assets, and social capital are the main causes of rural poverty (37). Turkey hasn’t had the characteristics of an agricultural country since 1980. Unemployment, seasonal jobs, and low wages have shifted poverty from rural to urban areas, and insufficient industrialization has exacerbated poverty in cities. Rural poverty, on the other hand, is still exceedingly severe. There were 15% of urban men and 13% of urban women who had better living conditions than the rural population (8). In 2003, the rural unemployment rate was 6.5 percent, and 33.9 percent of the population worked in agriculture, despite agriculture accounting for only 12.6 percent of GDP.
In Turkey, half of the population lives in cities with a moderate level of human development. These cities can be found in Anatolia’s Central, Black Sea, and Southeastern regions. In Western Anatolia, over 47 percent of the population resides in cities with high human development. Only 3% of the population resides in the least developed cities of Eastern Anatolia (Bingol, Bitlis, Hakkari, Agri, Mus, and Sirnak). All of the cities in the Marmara area (northwest Turkey) are significantly developed (38). In the Aegean area, the number of highly developed cities is also extremely high (74 percent) (west of Turkey). However, in Central Anatolia, this ratio is 40%, and in the Black Sea region, it is 7%. In Eastern and Southeastern Anatolia, none of the cities are well-developed (38). Many inequities exist in the Marmara region. Despite the fact that the cities in this region are among the most developed, 61.2 percent of the citizens belong to the poorest 20% of the Turkish population, compared to 4.3 percent who belong to the wealthiest 20%.
Rural areas accounted for 62.9 percent of those living in poverty, while urban areas accounted for 37.0 percent. The poor in rural areas above the age of 12 made up 73.1 percent of the total poor (73.1 percent for women and 73.2 percent for men). In metropolitan areas, women made up 51.5 percent of those living in poverty. The poverty rate for persons aged 15 to 64 was 48.5 percent (72.7 percent for rural areas and 27.3 percent for urban areas). Poverty was more prevalent in rural areas than in metropolitan areas, particularly in Eastern and Southeastern Anatolia (30,31,39,40) (
Is Turkey’s economy secure?
Turkey’s economy is ranked 107th in the 2022 Index for economic freedom, with a score of 56.9. Turkey is placed 42nd out of 45 European countries, and its overall score is lower than the regional and global averages. From 2017 to 2020, the Turkish economy developed slowly before picking up in 2021.
Is Turkey in IMF debt?
Turkey entered a debt-free partnership with the IMF last week, after 19 years as a debtor, after paying off debt quickly for several years.
Why is the Turkish lira depreciating?
Shortly after Erdogan’s address, Timothy Ash, emerging markets strategist at Bluebay Asset Management, wrote in an email note, “More total and utter bullshit from Erdogan.”
He added, “Foreign institutional investors don’t want to invest in Turkey because of Erdogan’s utterly insane monetary policy choices.” “There isn’t a single plot involving a foreign country.”
Turkey’s currency lost 44% of its value in 2021, owing in large part to the president’s failure to hike interest rates to combat inflation, despite the fact that he effectively controls the Turkish central bank’s levers. And Turks are exploring for alternatives to the lira as they lose faith in their own currency: Turkish shops are now displaying pricing in US dollars, and Turks are investing in cryptocurrencies such as bitcoin and ether.
RELATED: Inflation: Gas prices will get even higher
Inflation is defined as a rise in the price of goods and services in an economy over time. When there is too much money chasing too few products, inflation occurs. After the dot-com bubble burst in the early 2000s, the Federal Reserve kept interest rates low to try to boost the economy. More people borrowed money and spent it on products and services as a result of this. Prices will rise when there is a greater demand for goods and services than what is available, as businesses try to earn a profit. Increases in the cost of manufacturing, such as rising fuel prices or labor, can also produce inflation.
There are various reasons why inflation may occur in 2022. The first reason is that since Russia’s invasion of Ukraine, oil prices have risen dramatically. As a result, petrol and other transportation costs have increased. Furthermore, in order to stimulate the economy, the Fed has kept interest rates low. As a result, more people are borrowing and spending money, contributing to inflation. Finally, wages have been increasing in recent years, putting upward pressure on pricing.
What are the five factors that contribute to inflation?
Inflation is a significant factor in the economy that affects everyone’s finances. Here’s an in-depth look at the five primary reasons of this economic phenomenon so you can comprehend it better.
Growing Economy
Unemployment falls and salaries normally rise in a developing or expanding economy. As a result, more people have more money in their pockets, which they are ready to spend on both luxuries and necessities. This increased demand allows suppliers to raise prices, which leads to more jobs, which leads to more money in circulation, and so on.
In this setting, inflation is viewed as beneficial. The Federal Reserve does, in fact, favor inflation since it is a sign of a healthy economy. The Fed, on the other hand, wants only a small amount of inflation, aiming for a core inflation rate of 2% annually. Many economists concur, estimating yearly inflation to be between 2% and 3%, as measured by the consumer price index. They consider this a good increase as long as it does not significantly surpass the economy’s growth as measured by GDP (GDP).
Demand-pull inflation is defined as a rise in consumer expenditure and demand as a result of an expanding economy.
Expansion of the Money Supply
Demand-pull inflation can also be fueled by a larger money supply. This occurs when the Fed issues money at a faster rate than the economy’s growth rate. Demand rises as more money circulates, and prices rise in response.
Another way to look at it is as follows: Consider a web-based auction. The bigger the number of bids (or the amount of money invested in an object), the higher the price. Remember that money is worth whatever we consider important enough to swap it for.
Government Regulation
The government has the power to enact new regulations or tariffs that make it more expensive for businesses to manufacture or import goods. They pass on the additional costs to customers in the form of higher prices. Cost-push inflation arises as a result of this.
Managing the National Debt
When the national debt becomes unmanageable, the government has two options. One option is to increase taxes in order to make debt payments. If corporation taxes are raised, companies will most likely pass the cost on to consumers in the form of increased pricing. This is a different type of cost-push inflation situation.
The government’s second alternative is to print more money, of course. As previously stated, this can lead to demand-pull inflation. As a result, if the government applies both techniques to address the national debt, demand-pull and cost-push inflation may be affected.
Exchange Rate Changes
When the US dollar’s value falls in relation to other currencies, it loses purchasing power. In other words, imported goods which account for the vast bulk of consumer goods purchased in the United States become more expensive to purchase. Their price rises. The resulting inflation is known as cost-push inflation.