Turkish inflation accelerated much faster than expected with the sharpest increase since the start of 2022, underscoring the central bank’s challenge as it raises interest rates to try to end a cost-of-living crisis.
(Bloomberg) — Turkish inflation accelerated much faster than expected with the sharpest increase since the start of 2022, underscoring the central bank’s challenge as it raises interest rates to try to end a cost-of-living crisis.
With food and energy costs on the rise, the pace of annual price gains soared to 58.9% last month from almost 48% in July, according to Turkey’s statistical office. The median estimate in a Bloomberg poll of economists was 55.9%.
The month-on-month figure was 9.1%, also far more than forecast. The core index, which excludes volatile items, had an annual gain of 64.9%.
“There is a notable surge in core prices,” said Erkin Isik, chief economist at QNB Finansbank. “We expect year-end inflation around 70%,” with a peak near 75% in mid-2024 because of “a base effect from natural gas prices,” he said.
Restoring price stability has increasingly become a priority since President Recep Tayyip Erdogan won reelection in May and then revamped his economic team by appointing Finance Minister Mehmet Simsek and central bank Governor Hafize Gaye Erkan.
After the data release, Simsek said in a post on X, the social media platform formerly known as Twitter, that “the fight against inflation will take some time.”
“We are in a transition period,” said Simsek, who’s a former Merrill Lynch bond strategist. “We will do whatever is necessary” with steps such as monetary tightening and changes to credit policy “to control inflation and then lower it,” he said.
An effort to end an era of ultra-low borrowing costs has so far included three rate hikes by the central bank to 25% and the unraveling of some regulations that sought to keep credit cheap.
But the second-biggest depreciation in emerging markets this year is still feeding through to the economy and amplifying the impact on prices of recent tax hikes announced by the government to finance a widening budget deficit. Gains in the lira since a bigger-than-anticipated rate hike in late August may ease some pressure on prices.
Turkey’s currency, which fluctuated before the data release, traded 0.2% weaker against the dollar as of 11:59 a.m. in Istanbul. It’s lost about 30% of its value so far this year.
What Bloomberg Economics Says…
“Turkey’s inflation problem is growing at a faster pace than anticipated. August’s inflation print suggests a year-end inflation rate in excess of 65%, in our view. That’s well above the Central Bank of the Republic of Turkey’s 58% forecast. Even so, this is unlikely to impact the central bank’s rate path and we maintain our call for a policy rate of 30% at year-end.”
— Selva Bahar Baziki, economist. Click here to read more.
Following August’s figures, Bloomberg Economics revised its year-end inflation call to 65.5% from 57%.
In late July, Erkan said inflation would probably end this year at 58% and peak in the second quarter of 2024 at about 60%. Monetary authorities have warned, though, that price growth may breach their year-end forecast.
The central bank opted for a jumbo rate hike on Aug. 24 — one far larger than expected — in an attempt to anchor inflation expectations among businesses and investors. The central bank is scheduled to decide on rates again on Sept. 21.
Most Wall Street analysts say there’s a need for even more tightening. The median year-end inflation expectation has jumped to 65%, according to a Bloomberg survey of economists from Aug. 25 to Aug. 30.
The impact of recent measures including the sharp rate hike “will only be felt with a lag,” Goldman Sachs Group Inc. analysts led by Kevin Daly said in a report before the data release. “Hence, we expect strong cost pressures to continue to drive inflation higher in the near term.”
–With assistance from Joel Rinneby.
(Updates with analyst comment in fourth paragraph.)
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