Economy
Fed’s fears start to be realized as tariff costs begin to hit consumers
A broad rise in prices, from coffee and audio equipment to home furnishings, pushed U.S. inflation higher in June, which economists view as a sign that the Trump administration’s escalating import tariffs are being passed on to consumers.
Overall consumer prices rose 0.3% in June, a roughly 3.5% annual rate, after a 0.1% increase in May, official data showed on Tuesday.
Economists – and Federal Reserve (Fed) officials – say they were expecting inflation to gather pace this summer as the lagged impact of tariffs gets passed along by businesses, and the June data suggest central bank policymakers in particular may remain reluctant to cut interest rates until more information is at hand.
The tariff price shock could ultimately prove a temporary, one-time adjustment. But with the final tariff levels still being considered by President Donald Trump, and steeper levies threatened as of Aug. 1, the inflation outlook remains unsettled.
The latest data “showed that tariffs are beginning to bite,” said Omair Sharif, head of Inflation Insights, “apparel prices rose, household furnishing prices jumped … and recreation commodities increased.”
Those are heavily imported items and the increases were substantial.
Prices for audio-video equipment rose 1.1% over the month and have risen 11.1% on a year-over-year basis, the largest jump ever in a category where globalization had generally meant steady or falling prices.
It will likely strike a note of caution for the Fed, which has been facing almost daily criticism from Trump for not cutting interest rates, a step central bankers have been reluctant to take until it is clear where the tariffs will leave the U.S. economy.
Yields on U.S. Treasury securities rose to their highest in about a month, and interest rate futures reflected growing uncertainty that the Fed would resume rate cuts in September, with a model from CME Group showing that decision was seen as a near toss-up after being the baseline expectation for the past month or so.
In a speech in Washington on Tuesday, Federal Reserve Bank of Boston President Susan Collins warned that she continues to expect the rise in import taxes to push up inflation while pushing down growth and employment. But she added that strong balance sheets on both the business and household sides may help absorb the hit and lessen its impact.
“The impact of tariffs may be lessened somewhat by an ability for firms to decrease profit margins and for consumers to continue spending, despite higher prices. As a result, the adverse impact of tariffs on labor market conditions and economic growth may be more limited,” Collins said.
Trump on social media said that consumer prices were “LOW” and repeated his call for the Fed to cut rates. The consumer price level was about 1.2% higher in June compared to December, the last full month before Trump started his second term.
White House Press Secretary Karoline Leavitt said the fact that core inflation, which excludes food and energy prices, increased less than expected, “proves that President Trump is stabilizing inflation.”
Core inflation increased at a 2.9% annual rate in June, slightly below the 3% consensus forecast, but slightly faster than in May. Food and energy costs both increased, pushing headline inflation up to 2.7% from 2.4% the month before.
“With increases in categories like household furnishings, recreation, and apparel, import levies are slowly filtering through,” wrote Seema Shah, Chief Global Strategist at Principal Asset Management. “It would be wise for the Fed to remain on the sidelines for a few more months at least.”
Investors still expect the Fed in September to cut a quarter of a percentage point from the current 4.25% to 4.5% benchmark interest rate maintained since December, but odds of a cut at the upcoming July 29-30 meeting are now below 5%.
Powell had earlier pinpointed this summer as the time when the U.S. central bank will learn if inflation is responding to the tariffs applied on trading partners and various industrial sectors.
So far, the levies have had only a limited impact on inflation, but economists broadly have expected to see them eventually filter into retail prices.
“We know there is a lag between implementation and the inflationary effect,” said Gregory Daco, chief economist at EY-Parthenon. “Businesses manage imports using different processes … We have not seen the full-blown effects of tariffs on CPI data … I would expect to start to see more.”
Clawing back tariff costs
The June CPI data will likely leave the Personal Consumption Expenditures Price Index the Fed uses for its 2% inflation target well above that goal, with increased uncertainty now that Trump has threatened tariff levels of 30% or more on Mexico, Canada and the European Union, and more actions are always possible.
The PCE index outside food and energy rose at a 2.7% annual rate in May; recent Fed policymaker projections see it hitting 3.1% by the end of 2025; and the most recent round of tariffs threatened by Trump for Aug. 1 could push it even higher.
The new tariff rates, “if fully passed through, would add about 0.4 percentage points to the PCE price level,” Michael Feroli, chief U.S. economist at JPMorgan, estimated. “Given imperfect pass-through, margin compression, a more likely estimate is 0.2-0.3 points. We think this bolsters the case for the Fed to take a very cautious approach to rate cuts.”
Daco said there was already “divergence” beginning across a wide swath of goods where prices are rising faster than they did before Trump’s initial rounds of tariffs.
The price of household furnishings, for example, jumped a full percentage point in June. Prices of those products had been dropping, but reversed course in the spring.
Other economists have pinpointed different items that could show where the new import taxes are starting to hit consumer prices.
Sharif, the head of Inflation Insights, said the broad category referred to as “recreational commodities,” which includes things like toys and audio and visual equipment that are often imported from China, bears watching – and rose 0.8% in June, twice as fast as in the preceding two months.
Outdoor equipment and tools are also items that are heavily imported, and while the pace of price increases had picked up in the spring, it fell back in June to 0.2% versus 0.6% in May.
Still, “tariff costs are strikingly visible in June’s CPI data,” wrote Samuel Tombs, chief U.S. economist for Pantheon Macroeconomics. Excluding autos, prices for other non-food or energy goods rose at the fastest pace since June 2022, when the Fed was still in a battle to lower pandemic-era inflation.
“Prices rose especially sharply for goods which are primarily imported,” with prices for appliances, sports equipment and toys all rising nearly 2% on the month, he said.
Military spending around the world reached a new all-time high in 2025 to mark an 11th consecutive year of growth, a report by a conflict think tank showed on Monday, as insecurity and rearmament fueled defense budgets.
Expenditure rose by 2.9% compared with 2024 to nearly $2.9 trillion, despite a reduction by the U.S., the Stockholm International Peace Research Institute (SIPRI) said.
The 2025 total brought the increase over the past decade to 41% and took spending as a share of global gross domestic product (GDP) to 2.5% – its highest level since 2009.
“Given the range of current crises, as well as many states’ long-term military spending targets, this growth will probably continue through 2026 and beyond,” SIPRI said in the report.
The top three military spenders, the U.S., China and Russia, accounted for a combined $1.48 trillion, or 51% of global spending.
The U.S. remained by far the top spender last year despite a 7.5% decline to $954 billion. That was mainly because no new financial military assistance for Ukraine was approved, the report said. In the previous three years, U.S. military funding to Ukraine totaled $127 billion.
“The decline in U.S. military expenditure in 2025 is likely to be short-lived,” SIPRI said.
“Spending approved by the U.S. Congress for 2026 has risen to over $1 trillion, a substantial increase from 2025, and could rise further to $1.5 trillion in 2027,” it said.
Researcher Lorenzo Scarazzato said the decrease from the U.S. was more than offset by increases in Europe and Asia, as the world marked “another year of wars and increased tensions.”
Scarazzato said this was also reflected in the global “military burden,” the share of worldwide GDP devoted to military spending.
“Everything points to a world that feels less secure and is spending on its military to compensate for the global landscape,” he told Agence France-Presse (AFP).
Europe main driver
The main contributor to higher global spending was a 14% rise in Europe to $864 billion.
Concerns over the reliability of the U.S. as a NATO partner contributed to higher budgets, SIPRI expert Diego Lopes da Silva said, as governments sought to bolster security amid a deteriorating international environment.
“That is driven by two major factors. One is the ongoing war in Ukraine, and the other is the decreased U.S. engagement with Europe,” Scarazzato said.
He explained that the U.S. is “pushing for Europe to take more care of its own defense.”
Spending by Russia and Ukraine continued to grow in the fourth year of the war, while increases by European members of the NATO alliance led to the sharpest annual growth in Central and Western Europe since the end of the Cold War.
Germany, the fourth-largest spender, raised expenditure by 24% in 2025 to $114 billion.
For the first time since 1990, German defense outlays exceeded the NATO target of 2% of GDP.
Spain also recorded a 50% jump to $40.2 billion, pushing military spending above 2% of GDP for the first time since 1994.
In total, 22 European NATO members met the benchmark.
Their combined spending reached $559 billion to rise faster than at any time since 1953, said Jade Guiberteau Ricard, researcher with the SIPRI Military Expenditure and Arms Production Program.
The expenditure of the 32 NATO members amounted to almost $1.6 trillion in 2025, or 55% of spending globally.
France’s expenditure rose by 1.5% to $68 billion. Spending by the U.K. decreased by 2% to $89 billion.
Russia and Ukraine each record the highest share of government spending allocated to the military.
Russia’s spending rose 5.9% to $190 billion, equivalent to 7.5% of GDP.
Ukraine, meanwhile, boosted spending by 20% to $84.1 billion – a staggering 40% of GDP.
Türkiye focuses on domestic industry
Türkiye increased its expenditure by 7.2% from 2024 to $30 billion, SIPRI said, making it the 18th biggest spender in the world.
The figure accounted for 1.9% of Türkiye’s GDP, and the growth rate lifted the increase over the past decade to 94%.
The overall increase was mainly driven by the country’s continuous investments in its domestic arms industry.
Allocations to the special fund to support the Turkish arms industry rose by 25% year-over-year and accounted for 22% of Türkiye’s total expenditure in 2025, SIPRI said.
Türkiye has injected billions of dollars over the past two decades to transform it from a nation heavily reliant on equipment from abroad to one that is a major exporter and where homegrown systems now meet almost all of its defense industry needs.
For much of the past two decades, Ankara has expressed frustration over its Western allies’ failure to provide adequate defense systems against missile threats despite Türkiye being a NATO member.
Türkiye’s defense exports sealed a record 2025, rising about 48% year-over-year to more than $10 billion. The goal for 2028 is to lift the full-year figure to $11 billion, placing Türkiye among the world’s top 10 biggest defense exporters, according to officials.
Middle East tensions
Despite persistent tensions in the Middle East, expenditure in the region rose only marginally, by 0.1%, to $218 billion.
While most countries in the region increased spending, Israel and Iran actually recorded declines.
In Iran, it fell 5.6% to $7.4 billion, but this was mostly due to high annual inflation of 42%. In nominal terms, spending actually rose.
Israel’s 4.9% drop to $48.3 billion reflected a reduced intensity in the Gaza war after a January 2025 cease-fire deal, the researchers explained. Israeli spending was still 97% higher than in 2022, they added.
The report showed Saudi Arabia’s expenditure increased by 1.4% to reach $83.2 billion, making it the eighth biggest military spender in the world.
In Asia and Oceania, spending reached $681 billion, an 8.5% increase from 2024, the region’s largest annual increase since 2009.
Scarazzato said the “major player” in the region was China, which has been increasing its spending every year for the past three decades, and spent an estimated $336 billion in 2025.
“But perhaps what’s interesting is the reaction of some other states, such as South Korea, Japan, and Taiwan, reacting to the threat perception,” he said.
Japan raised military expenditure by 9.7%, to $62.2 billion in 2025, equivalent to 1.4% of GDP, its highest share since 1958, while Taiwan increased its spending by 14% to $18.2 billion.
India, the fifth biggest military spender in the world in 2025, increased its military spending by 8.9% to $92.1 billion. Pakistan’s spending increased by 11% to $11.9 billion.
Total military spending in Africa increased by 8.5% in 2025 to reach $58.2 billion, SIPRI said.
Nigeria’s military expenditure grew by 55% to $2.1 billion in 2025, as insurgencies and extremist violence contributed to worsening insecurity.
The upward trend in global military spending is expected to continue in 2026, SIPRI’s da Silva said. He added that there were currently many conflicts worldwide and it was difficult to imagine the situation improving so much within a year that the trend would reverse.
The annual SIPRI report is considered the most comprehensive dataset of its kind. The researchers also include spending on personnel, military aid, as well as military research and development.
Türkiye’s military spending increased by 7.2% in 2025, according to a report by a conflict think-tank on Monday that also showed global expenditure hit a new all-time high, driven by wars and geopolitical tensions.
Türkiye’s expenditure reached $30 billion to make it the 18th biggest spender in the world, the Stockholm International Peace Research Institute (SIPRI) said.
The figure accounted for 1.9% of Türkiye’s gross domestic product (GDP), and the 2025 growth rate lifted the increase over the past decade to 94%.
The report showed global military spending rose by 2.9% compared with 2024 to nearly $2.9 trillion, marking an 11th consecutive year of growth.
That came despite a 7.5% reduction by the U.S., the world’s biggest spender, as President Donald Trump halted new financial military aid to Ukraine.
The 2025 total brought the growth over the past decade to 41% and took spending as a share of GDP to 2.5% – its highest level since 2009.
The top three military spenders, the U.S., China and Russia, accounted for a combined $1.48 trillion, or 51% of global spending.
The main contributor to higher global spending was a 14% rise in Europe to $864 billion.
In total, 22 European NATO members met the 2% of GDP benchmark. Their combined spending reached $559 billion to rise faster than at any time since 1953, according to SIPRI.
The expenditure of all the 32 NATO members amounted to almost $1.6 trillion in 2025, or 55% of spending globally.
In Türkiye, the overall increase was mainly driven by the country’s continuous investments in its domestic arms industry, SIPRI said.
Allocations to the special fund to support the Turkish arms industry rose by 25% year-over-year and accounted for 22% of Türkiye’s total expenditure in 2025, according to the report.
Türkiye has injected billions of dollars over the past two decades to transform it from a nation heavily reliant on equipment from abroad to one that is a major exporter and where homegrown systems now meet almost all of its defense industry needs.
For much of the past two decades, Ankara has expressed frustration over its Western allies’ failure to provide adequate defense systems against missile threats despite Türkiye being a NATO member.
Türkiye’s defense exports sealed a record 2025, rising about 48% year-over-year to more than $10 billion. The goal for 2028 is to lift the full-year figure to $11 billion, placing Türkiye among the world’s top 10 biggest defense exporters, according to officials.
Despite persistent tensions in the Middle East, military expenditure in the region rose only marginally, by 0.1%, to $218 billion, SIPRI said.
In Asia and Oceania, spending reached $681 billion, an 8.5% increase from 2024, the region’s largest annual increase since 2009.
Total military spending in Africa increased by 8.5% in 2025 to reach $58.2 billion, SIPRI said.
Türkiye outlined details on Monday of a broad package of incentives that top officials say is aimed at boosting competitiveness and attracting investment, and also positioning its biggest city as a leading financial gateway across the region.
Describing the planned reforms as “not an ordinary incentive package,” Treasury and Finance Minister Mehmet Şimşek said the measures amount to a comprehensive “tax architecture.”
“This is a full-spectrum structure covering goods, services, capital, talent and activities. Our priority is to move Türkiye into the top league in terms of global investment attractiveness,” he told a press conference in Ankara.
Şimşek said Türkiye was extending a tax exemption on services exports to 100% to target high-value sectors like software, gaming and medical tourism.
At the same time, it is reducing manufacturing exporters’ corporate tax rate to 9% to boost competitiveness and attract foreign direct investment (FDI), he said.
The tax reductions are long-term and “here to stay,” he told reporters, days after President Recep Tayyip Erdoğan first floated the comprehensive legislative package including the tax plans.
The package aims to increase the country’s competitiveness and overall economic appeal, Erdoğan said.
Ankara introduces it at a time when the U.S.-Israeli war with Iran rattles Gulf states, prompting some companies and banks there to consider other options.
Asked about this, Şimşek said the package was not meant to take advantage of war fallout and was in the works long before.
Some of the incentives, including zero corporate income tax on transit trade, are focused on the companies located in the Istanbul Financial Center (IFC), a state-backed clutch of glassy towers on the city’s Asian side.
The rate is 95% for those located outside the IFC, Şimşek said, noting it was set at 50% in years past.
Speaking at the same event, Vice President Cevdet Yılmaz said the package is designed to provide a “clear and reliable framework” for investors seeking stability in an uncertain global environment.
Yılmaz added that companies establishing regional headquarters in Türkiye would benefit from substantial tax exemptions and also said a centralized mechanism would be introduced to accelerate large-scale foreign investments and streamline administrative processes.
The package aims to “export more goods and services, attract more talent, entrepreneurs, capital, a new home that’s more encouraging local citizens to use Türkiye as a center of their activities and… placing IFC as one of the key regional hubs,” Şimşek said.
This month, the IFC’s CEO Ahmet Ihsan Erdem told Reuters that the Iran war prompted dozens of companies with operations in the Gulf to consider moving business there.
The exporter incentives include what Şimşek called a “radical step” toward reducing the corporate tax rate.
As the Iran war disrupts global energy supplies and sends prices soaring, Drin River, which descends through the mountains of northern Albania, is providing a buffer against the shock.
Swelled by winter rains and snowmelt, and dotted with hydroelectric dams built during communist times, the river’s power provides more than 90% of the Balkan country’s electricity output, helping to keep wholesale prices in check.
Albania is an example of how countries with a higher renewables output have been protected from steep rises in electricity prices since the United States and Israel attacked Iran on Feb. 28, price comparisons from across Europe show. That could help households, businesses and growth in those countries as the price impact trickles down to ordinary consumers in the coming months, analysts said.
It could also bolster Europe’s green energy transition, which has been criticised for lacking urgency and has come under attack from the likes of U.S. President Donald Trump.
Countries heavily reliant on oil and gas face steeper price rises, adding to inflationary pressure and increasing the chance of a global recession – a familiar worry for Europeans who weathered the energy crisis triggered by Russia’s invasion of Ukraine in 2022.
The crisis is raising the regional price floor for everyone, but the countries with the least flexibility and the greatest marginal dependence on imported fuels are seeing the strongest impact in volatility and peak pricing, said Satyam Singh, analyst at energy research firm Rystad.
Power price differences emerge across Europe
Across the Adriatic Sea from Albania, Italy, which generates more than 40% of its electricity from gas, has seen a more than 20% rise in its benchmark wholesale contract since the war began. In gas-hungry Germany, the benchmark has risen over 15%.
In contrast, the benchmark in France, which relies on nuclear energy for 70% of its electricity production, has risen by less than half of Italy’s over the same period. In Spain, which has rapidly increased renewable output to nearly 60% of total generation, prices have fallen. Albania also recorded lower average prices in March compared to last year, thanks to ample hydro capacity.
Gas-dependent countries like Italy, Germany and Greece all have some level of solar power production, but over-reliance on solar causes what’s called the “duck curve,” where prices are low in the middle of the day but spike in the early morning and late afternoon.
“The goal for most of these countries like Italy and Germany is to build a huge stack (of renewables and long-term storage) that offsets gas. It’s going to be a big challenge,” said Alessandro Armenia, a power analyst at commodities data and analytics firm Kpler in Paris.
Meanwhile, coal-producing countries like Poland and Serbia have also fared well, analysts said. In Greece, which has strong solar generation, the power grid operator wants a lignite-fired plant earmarked for closure to stay open for at least another year amid the Iran conflict.
Businesses, households feel the strain
Power price shocks for households are expected to be more muted than the jumps in wholesale costs seen for oil and gas, analysts say, as it can take months for these increases to work through the system.
The European Commission has developed plans to cut electricity taxes as it seeks to cushion the fallout from the war, although officials and analysts warn that state costs could balloon as a result.
Consumers already struggling with a rise in oil-based fuel prices are worried about dearer electricity.
In Cyprus, where households pay some of the highest electricity prices in the EU, the country’s dominant power provider sees prices rising as much as 20% by August, in part because of its own duck curve.
When the Iran war erupted, fuel costs for Marios Georgiou, a machine operator at a printing works in Limassol, soared as much as 20%, forcing him to quit one of his jobs and find alternative work closer to home. Electricity bills already cost him 200 euros (about $234.8) a month.
“I’ve got two jobs and I can barely break even. Everything is just going up,” the father of two said.
He’s not alone.
Nico Vanni, 47, runs the La Nave bakery in Castiglion Fiorentino, Italy. The company uses about 2,000 liters of diesel a month on deliveries, and its ovens run on natural gas. Suppliers have already announced increases in the cost of yeast, paper and plastic – and that’s before any power price increases.
“We can hold out for a few months, but not for long: the real risk is that we will have to intervene on staffing,” he said.
Old dams help Albania, but for how long?
In Albania, residents near the towering Vau i Dejes hydroelectric dam joke that hydropower is the only positive legacy of the country’s decades of communist rule.
“Albania’s heavy reliance on renewable energy, particularly hydropower, has played a crucial role in cushioning the country from the worst effects of the crisis,” Albania’s Energy Ministry said in a statement, although it acknowledged that it wasn’t immune.
The country still imports power when demand peaks, and consumers are protected by government price subsidies.
“The Iran conflict has increased pressure behind the scenes, particularly on public finances,” the energy ministry said. “The system is holding steady on the surface, while the real strain is accumulating underneath.”
Oil prices rose slightly on Monday while stocks were mixed, with the U.S. and Iran no closer to ending their two-month war after President Donald Trump cancelled his envoys’ trip for peace talks over the weekend.
Hopes that the two sides could make progress during negotiations in Pakistan were dashed Saturday by the U.S. president, who said there was no point “sitting around talking about nothing.”
He said on Fox News that he told his team, “We have all the cards. They can call us anytime they want, but you’re not going to be making any more 18-hour flights to sit around talking about nothing.”
However, he told reporters a revised proposal from Iran had followed within minutes of his decision.
“They gave us a paper that should have been better and – interestingly – immediately, when I cancelled it, within 10 minutes, we got a new paper that was much better,” he said, without elaborating.
Asked separately whether the cancellation meant a return to hostilities, Trump said: “No, it doesn’t mean that. We haven’t thought about it yet.”
But even before Trump’s move, prospects for talks were uncertain, with Iranian state television saying Foreign Minister Abbas Araghchi had no plans to meet U.S. officials and that Islamabad would act as a conduit for proposals.
Axios on Sunday cited unnamed sources, including a U.S. official, as saying Tehran had provided a new offer to reopen the Strait of Hormuz – through which a fifth of global oil and gas passes – with nuclear talks pushed back to a later date.
Talks between the rivals have reached an impasse, with Iran hitting out at a U.S. blockade of its ports and the White House demanding that Tehran allow ships to transit the crucial waterway.
Iranian state media said Monday that Araghchi had arrived in Saint Petersburg for talks with Russian President Vladimir Putin. The trip comes after visits to Islamabad and Oman in a flurry of regional diplomacy.
Soon after landing, Araghchi blamed the United States for the failure of the peace talks, citing its “excessive demands,” adding that “safe passage through the Strait of Hormuz is an important global issue.”
Oil prices rose around 2% earlt Monday, though lingering hopes that a deal can eventually be reached have tempered the gains.
However, Fawad Razaqzada of Forex.com, warned they could surge again at any time.
“If tensions were to escalate further, particularly into open conflict, there’s a clear risk of a sharper spike,” he wrote.
“For now, though, as long as shipping through the Strait remains constrained, that premium is unlikely to fade. Until there’s a credible breakthrough, the path of least resistance still looks higher, with a move beyond $110 appearing increasingly plausible.”
Stocks fluctuated, with Tokyo, Seoul, and Taipei sharply up on the back of AI-fuelled tech gains following US giant Intel’s healthy revenue forecasts.
There were also gains in Shanghai, Mumbai, Bangkok and Jakarta, while Hong Kong, Sydney, Singapore and Manila fell.
London fell at the open while Paris and Frankfurt rose.
That came after the S&P 500 and Nasdaq ended Friday at fresh record highs.
Investors were also looking ahead to earnings this week from U.S. tech titans Alphabet, Meta, Microsoft, Amazon and Apple, while the Federal Reserve will hold a closely watched policy meeting at which it is expected to stand pat on interest rates.
Key figures at 07:15 GMT
West Texas Intermediate (WTI): up 1.9% at $96.18 a barrel
Brent North Sea Crude: up 2.1% at $107.51 a barrel
Tokyo – Nikkei 225: up 1.4% at 60,537.36 (close)
Hong Kong – Hang Seng Index: down 0.3% at 25,911.28
Shanghai – Composite: up 0.2% at 4,086.34 (close)
London – FTSE 100: down 0.2% at 10,362.72
Euro/dollar: up at $1.1727 from $1.1717 on Friday
Pound/dollar: up at $1.3537 from $1.3530
Dollar/yen: down at 159.30 yen from 159.42 yen
Euro/pound: up at 86.63 pence from 86.60 pence
New York – Dow Jones: down 0.2% at 49,230.71 (close)
Türkiye’s economic management has created a successful framework and risk management, but the program involves a dynamic process and needs a “fine-tuning” and review, the head of a leading business association said, according to remarks published on Sunday.
“We will not set aside the fight against inflation, but with fine-tuning, we need to review the exchange rate policy, export regime, and import regime within the program. I believe we must design and implement this integrated process very quickly,” said Şekib Avdagiç, the chairperson of the Istanbul Chamber of Commerce (ITO).
Speaking to journalists, Avdagiç said that thanks to the successful work of the economic management over more than three years, Türkiye has moved from a problematic foreign exchange reserve situation to a much more reasonable level, and that an important goal has been achieved in terms of external funding access.
However, he noted that with the developments triggered by the war, it would be appropriate to evaluate the situation from a broader perspective.
“As the business world, we have tried to contribute as much as we can to achieving the targets of the economic program. For this, the business community has also paid a significant cost,” Anadolu Agency (AA) quoted him as saying.
Avdagiç’s remarks on the economic program, which was put in place in the middle of 2023, marking a shift to more conventional macroeconomic policies to curb soaring inflation, come amid some calls to pause the fight against inflation amid the ongoing war in the Middle East.
Earlier this week, Treasury and Finance Minister Mehmet Şimşek sought to dismiss these calls, arguing that sustainable and high growth can only be achieved through low inflation.
“This is a very myopic approach,” he said. “The path to permanent and high growth is through the process of low inflation. If inflation falls, growth will multiply.”
Türkiye’s annual inflation dropped to 30.87% in March from 31.53% in February, compared to the peak of around 85% in October 2022 and around 65% in 2023.
Responding to a question about the central bank’s interest rate decision, Avdagiç went on to say that: “I do not think it would be very correct, realistic, or result-oriented to look at the issue merely as a simple interest rate increase or a decision to keep it unchanged.”
“I believe we are entering a period where economic processes must be reviewed holistically in terms of the sustainability of the business world,” he argued.
“The economic management has created a successful framework and risk management. It is not possible to ignore our gains,” he maintained.
“At this stage, however, we think that, together with the conditions brought by the war and taking into account the expectations of the business world, some updates are needed in the policy that has so far been financial- and reserve-heavy,” he added.
“Of course, the program involves a dynamic process. We will not set aside the fight against inflation, but with a fine-tuning, we need to review the exchange rate policy, export regime, and import regime within the program. I believe we must design and implement this integrated process very quickly.”
The war between the U.S., Israel and Iran, which began two months ago, has led to a notable ascent in global energy prices, while also threatening supply chains of raw materials, including fertilizers, which are used for crops.
The conflict has added pressure on countries relying on imports, but in the face of disruptions, Ankara has touted the success of its diversification strategy and relatively low dependence on Gulf countries for oil and gas supplies.
In response to uncertainties, the Turkish central bank has, in both of its last policy meetings, kept interest rates unchanged at 37%.
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