Treasury and Finance Minister Mehmet Şimşek late Monday sought to reassure the public that the Turkish government is fully aware of the economic hardships citizens are facing and emphasized that they are pursuing lasting solutions rather than quick fixes.

"Inflation is the most unfair tax – it disrupts income distribution and must be controlled for sustained prosperity," Şimşek told an interview with private broadcaster CNN Türk. He assured that inflationary pressures are being managed and that policy measures are already bringing the situation under control.

He emphasized that this year is being treated as a "transition year" in the battle against inflation, with a focus on stabilizing financial markets.

"We prioritized financial stability because we had vulnerabilities, which we have since addressed. We've left the most challenging phase behind and have crossed a significant threshold by managing financial risks," the minister said.

Türkiye's challenge of persistently high growth in price gains has been exacerbated by global supply chain disruptions and fluctuating energy prices. Authorities have been pursuing more than a year-long policy-tightening effort to rein in inflation and overheated demand.

Since June last year, the central bank has hiked interest rates by 4,150 basis points to 50% and has maintained that it will keep its monetary policy tight until inflation aligns with its targets. Over time, interest rate hikes increase the cost of borrowing across the economy, including for mortgages, auto loans and credit cards.

Annual inflation dipped below 52% in August, compared to its peak of 75% this May. The sharp drop is expected to continue as the tightening campaign brings price relief.

'No quick fixes'

"We are aware of the difficulties, and our citizens are justified in their complaints. They're right – there is a struggle to make ends meet. We must, by all means, control and reduce inflation to ensure lasting prosperity and purchasing power," Şimşek said.

"Last year, the average increase in a basket of goods was 65%, whereas this year, it's 40%. Prices are still rising, but at a slower pace. I want to emphasize again: we are fully aware of how much low-income citizens are affected, but there are no quick fixes."

The central bank forecasts inflation to slow to 38% at the end of this year and 14% next, projecting it to decline further to 9% by the end of 2026.

The government's updated medium-term economic program forecasts, released last week, see inflation falling to 41.5% by year-end. It is forecasted to ease to 17.5% by the end of 2025 and 9.7% by 2026.

Şimşek reaffirmed the government's pledge to bring inflation back to single digits, projecting that it would fall to around 30% in the first quarter of 2025, and likely to the 20% range by mid-year.

"We are on track to bring inflation below 20% by the end of 2025," he stated, adding that empirical data and past experience support this forecast.

Gains in current account, reserves

Şimşek underscored the government's efforts to reduce Türkiye's external vulnerabilities, highlighting the notable improvement in the current account deficit, which has been reduced from $57 billion in May 2022 to $19 billion.

Describing it as a major achievement, he also pointed to the increase in international reserves.

The central bank's total reserves rose from $98.5 billion last May to $153 billion as of last Friday, said Şimşek."Our net reserves, excluding swaps, improved by $78 billion, and recent strong inflows have pushed the improvement in net reserves to over $90 billion," he said.

According to Şimşek, these improvements have significantly reduced Türkiye's external vulnerabilities and strengthened its financial standing.

Decline in risk premium, borrowing costs

Şimşek noted a marked drop in Türkiye's risk premium, which has fallen from over 700 basis points in May 2022 to under 270 basis points.

This reduction, he said, has lowered Türkiye's external borrowing costs, with the interest rate on 10-year U.S. dollar bonds dropping from 10% last year to 6.8% today.

"This allows Türkiye to borrow at significantly lower rates, reducing the overall financial burden," he explained.

Growing international credibility

Şimşek also highlighted that Türkiye's removal in late June from the Financial Action Task Force (FATF)'s "gray list" has enhanced the country's international reputation.

"Being on the gray list subjected our citizens and companies to extra scrutiny when opening accounts abroad. Exiting this list is a major win for our financial system," he said.

He added that this has contributed to reducing external risks and improved financial resilience.

Credit rating upgrades

Şimşek was optimistic about Türkiye's future, pointing to the country’s improved credit ratings by Moody's, S&P and Fitch.

He highlighted that Türkiye is the only country to have received a credit rating upgrade from the three major agencies this year.

"If your country's risk premium is decreasing, the real sector will benefit from it," he said, noting that the current policy efforts will lead to a more predictable and stable financial environment.

Services inflation

Addressing services inflation, which he described as more stubborn than goods inflation, Şimşek noted that factors like rent are slower to respond to policy changes.

He recalled that the government had ended the regulation that capped rent increases at 25%, but the underlying inflationary trends in services still need more time to reverse.

"Services inflation lags behind due to the nature of how prices are set in the sector, particularly with rents being pegged to the previous 12 months' inflation rate," he said.

Housing supply

Şimşek also spoke about efforts to increase housing supply, especially in the regions devastated by last year's earthquakes.

He said 201,000 homes were set to be delivered this year, with an additional 250,000 expected in 2024.

Şimşek noted that these efforts, including projects to increase supply in Istanbul, would help alleviate some upward pressure on housing costs.

"The decline in service inflation will become more noticeable as these projects come to fruition," he added.

Patience needed

Şimşek stressed that the government’s economic strategy is designed for the long haul, aiming for a sustainable recovery rather than short-term relief.

"We acknowledge the high cost of living, but we have been prioritizing macroeconomic stability in the first year. Reserves are no longer an issue, and we have reduced major risks," he said.

"President Erdoğan fully supports our plan. We just need time and patience."