Turkey: inflation rises again; what to expect?

Turkish prices rose at their fastest rate in over two years in September, reaching nearly 20%. Inflation is a hot economic issue as Erdogan presses the central bank.

Inflation in Turkey is still on the rise: Data released on Monday, October 4, showed that the consumer price index rose at an annual rate of 19.58% last month, up from 19.25% in August.

The result is four times higher than the central bank’s official inflation target and represents the largest annual increase since March 2019.

Erdogan has had to face growing public discontent over the soaring cost of living. But the president, a well-known opponent of high-interest rates, also pressured the country‘s central bank to lower financing costs. As a result, the lender cut its benchmark lending rate last month, surprising analysts.

What to expect in Turkey with inflation still on the rise?

Prices continue to rise in Turkey: the data.

Consumer prices in Turkey jumped again in September, driven by a surge in the cost of energy.

The annual increase in the prices of food products, which constitutes about a quarter of the reference basket of consumption, was little changed (upwards) and stood at 28.79%. Weak lira, arid climate that hit crops, and supply bottlenecks influenced the result.

The inflation rate in the energy sector rose to 22.77% from 20.72% in August. The main core index monitored by the central bank increased by 22 basis points to 16.98%.

Last month, Governor Sahap Kavcioglu surprisingly cut interest rates shortly after emphasizing the role of core prices in his forecast, citing transient factors affecting primary inflation.

President Erdogan has never hidden his aversion to the policy of raising rates to curb inflation, changing the central bank’s leadership several times. So the institute’s latest move to lower rates seemed like a response to the Turkish leader’s wishes. Moreover, given next year’s elections, Erdogan wants at all costs to revive the economic fortunes in a period in which the polls are showing him in decline.

His government accused supermarkets of carrying out unfair pricing practices, and on Sunday, October 3, Erdogan promised to open 1,000 new stores nationwide to supply goods at “appropriate” prices.

What to expect from inflation, rates, growth in Turkey?

According to Bloomberg, several Turkish economists have said the rate cut was a serious mistake, likely to put the nation in economic hardship ahead of the elections scheduled for mid-2023.

According to Reuters, other experts expect the bank to lower the benchmark rate further by the end of the year, and several institutions expect a cut to 15% by mid-2022.

Ibrahim Aksoy, the chief economist at HSBC Asset Management Turkey, said: “I think the central bank may continue to cut rates at the October 21 meeting due to the emphasis placed on the tightening effects of commercial loans .”

According to other analyzes, Turkey’s relatively low foreign reserves, heavy imports, and an inflation-adjusted “real” interest rate that turns more negative are all alarms for the currency. In addition, the depreciation of the lira pushes inflation to a higher level.

Gurkayanak, a former US Federal Reserve Board economist, said that combined with corporate high external debt means exports benefit slightly from rate cuts. At the same time, private banks will reduce rather than raise the rate again. Credit.

For Turkey, months of crucial economic decisions are expected.

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