Turkey launched an unusual experiment to fight inflation by cutting interest rates. That’s how it turned around dramatically

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While much of the world eagerly awaits to see whether central banks will continue to raise interest rates to combat a post-pandemic inflation spike, Turkey is bucking the global trend.

The Nations the central bank left rates unchanged at 14% for a seventh consecutive month in an unorthodox experience.

Most economists around the world believe that the best way to control inflation is to raise interest rates.

By increasing the cost of borrowing money, central banks are trying to force you to buy less.

While this can lead to slower economic growth and higher unemployment, it can also lower the costs of goods and services because there is simply less demand to buy them.

But Turkish President Recep Tayyip Erdoan thinks it’s a myth.

He fired three central bank governors in four years for trying to raise interest rates, and called anyone who links rates and inflation “illiterate and traitors.”

“Pay no attention to the ramblings of those whose only quality is to see the world from London or New York,” he said in May.

But as the world grapples with inflation caused by Russia’s war in Ukraine and rising energy costs, Turkey has suffered more than most.

Officially, its inflation rate reached almost 80% in June, its highest level in 24 years.

But independent research by the country’s ENAG economists group found prices jumped 175% in June from a year earlier.

Turkish economist Ozan Şakar says the spiraling cost of living is partly due to President Tayyip Erdogan’s unorthodox monetary policy.(ABC News: Tom Joyner)

“Turkey’s inflation rate is an enigma at the moment,” said Turkish economist Ozan Şakar.

Turks struggle with soaring prices

When her husband died last year after a long stay in hospital, Sevim Kilic’s life changed immediately.

Not only had she lost the love of her life, but also a large part of her livelihood.

Until his death, the couple from a poor, predominantly Kurdish district of Istanbul relied on their monthly state pension of 5,500 liras, or about $460.

This sum had allowed the two men to live modestly, allowing them to heat their house in winter and to cook for their children and grandchildren when they came to visit them.

An older woman in a deep turquoise hijab sits on a bed with her hands clasped in her lap, smiling
Sevim Kilic lives off his pension, but says rising inflation has pushed his cost of living far beyond his means.(ABC News: Tom Joyner)

But with the death of her husband, her pension disappeared, and suddenly her income was cut in half.

At the same time, the price of simple groceries that she once bought without hesitation was rising rapidly.

Since last year, eggs have quadrupled in his local market. The cheese has tripled. The price of the washing powder she regularly buys has increased 20 times.

His life quickly changed. Meat disappeared from his diet. She started rationing potatoes. She stopped buying gifts for her grandchildren. Her daughter had to step in to pay her rent and bills.

“I can’t travel anymore. I can’t go anywhere. I can’t even go to the cemetery once a week to visit my husband,” Ms Kilic said.

Soaring costs have also gutted small businesses.

‘What are we supposed to do?’

Around the corner from Mrs. Kilic’s apartment, Ferhat Dogan sells his tomatoes, apricots and cucumbers.

A man with a thick mustache wearing a gray cap and a blue apron holds apricots in his hands, next to a fruit stall
Rising inflation has pushed the prices of staples like fruits and vegetables through the roof.(ABC News: Tom Joyner)

Like many other traders in Turkey, Mr. Dogan has been selling his produce to locals on credit for years, keeping a scribbled ledger in his hand where he records sales and amounts owed.

In recent months, his income has collapsed.

Regulars who once filled bags with her cherries or peaches can now only afford a quarter of what they once could.

Mr. Dogan has been forced to raise his prices based on what he has to pay his suppliers.

Even its simple credit system is feeling the strain.

Only that morning, a woman bought a watermelon, promising to pay him back.

“She said she would bring me the money, but she never did,” he said wistfully.

“That watermelon was 50 lira.”

Fruit trays including grapes, apples, stone fruits and melons are stacked.  Signs say 15/kilo
Inflation in Turkey has reached almost 80%, leading to a near doubling of food prices.(ABC News: Tom Joyner)

Another fruit vendor in a nearby neighborhood, Abdurrahman Boz, has customers who can now only afford a single tomato. He sells them for five lire each.

“The economy is really bad,” he said.

On another street, an elderly woman returning home with her morning groceries lifts two bags full of groceries as if to show evidence of the poor health of the economy.

She lists their contents: a loaf of bread bought for five liras, two packets of chicken gizzards for 50 liras, 15 eggs and a packet of bulgur.

The total bill five times was what she paid once.

“What are we supposed to do? she said, exasperated.

“I don’t think it will get better”

In response to the fall in the value of its currency, the Turkish government reduced taxes on certain goods, distributed subsidies and increased the minimum wage for
5,500 lire, or about $450 per month.

But minimum wage workers have not found much respite.

Salaries are far from covering the cost of raising a young family, said Sedat Şirin, a gardener at an apartment building in Istanbul.

A man and a waiter are seated at a table and share a plate of flatbread.  A tray with cups of tea is also on the table
Sedat Şirin earns minimum wage as a gardener in an apartment building. He struggles to support his son, Azad.(ABC News: Tom Joyner)

Mr. Şirin no longer drives his car if he can help it and has started tending a small piece of land at the back of the building to grow tomatoes and cucumbers to feed his family.

“I don’t think it will get better,” he said.

“This is how our life goes on.”

Mr. Şirin’s young son, Azad, suffers the economic crisis in miniature.

Prices for her school canteen have risen sharply, costing her parents at least 60 lira a day.

To compensate for the extra cost, Mr. Şirin suspended his sons’ pocket money.

Steam rises from a double stack kettle on a gas stove near a window.  A pot of potatoes is on another boiler
Those on the state pension say it is no longer enough to cover basic provisions.(ABC News: Tom Joyner)

“The children are unhappy, their heads are bowed,” Mr. Şirin said, glancing at his son, who was watching lazily nearby.

With an election looming next year, President Erdogan faces what political analysts widely see as a tough re-election, with inflation likely to be a key issue.

“Turkey is a cradle of agriculture in human civilization,” said economist Ozan Şakar.

“To think that our people are now struggling to get food when they have managed to do so for thousands of years is utterly unthinkable.”

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