Inflation in Turkey surges to 47.83% in July following post-election policy shifts

26 days ago
Inflation in Turkey surges to 47.83% in July following post-election policy shifts

In Turkey, the annual inflation rate surged to 47.83 percent in July, a significant increase from 38.2 percent, according to official data released on Thursday. This uptick comes just a week after the central bank revised its year-end forecast to more than double the previous estimate.

As Turkey continues to make significant policy changes following the May election, the latest figure falls in line with what was anticipated. This shift includes the end of a period spanning over two years characterized by ultra-low interest rates.

Last week, the central bank made a significant adjustment to its year-end inflation forecast, now projecting a rate of 58 percent compared to the previous forecast of 22.3 percent. This revision comes after facing skepticism from independent economists for years regarding the accuracy of the official inflation rate.

The official rate had been steadily dropping since reaching a more than two-decade high of 85 percent in October last year. The central bank and economists have forecast an upward trend from July.

The consumer prices skyrocketed by almost 9.5 percent on a month-on-month basis, according to the TUIK state statics agency.

A separate study released by independent economists from the ENAG group who question the official data put the July figure at 122.88 percent.

At her debut press conference last week, new central bank governor Hafize Gaye Erkan said inflation would increase “temporarily” due to the rising exchange rate of the lira as well as fiscal measures.

Under the former Goldman Sachs and First Republic Bank executive, the central bank twice hiked its interest rates from 8.5 percent to 17.5 percent even though that was not found ambitious enough by markets.

‘New policy’

“It’s clear that interest rate hikes are just one part of the new policy shift under way in Turkey at the moment and that monetary tightening further ahead will be gradual,” Liam Peach, senior emerging markets economist at London-based Capital Economics, said in a policy note.

“We think a rise in the policy rate to 27.50 percent or so by year-end is needed to sustain investor confidence,” he suggested.

Economists welcomed President Recep Tayyip Erdogan’s turn to more traditional economics even though he still believes that high interests rates contribute to – rather than cure – growing consumer prices.

He began pushing the central bank to slash borrowing rates at all costs in 2021, setting off the worst inflationary spiral of his rule.

But Erdogan said after being re-elected he would allow his team economic team that includes Erkan and market friendly Mehmet Simsek as finance minister to take steps to fix the country’s troubles.

“The new team are impressive and can design a route out of crisis,” BlueBay Asset Management economist Timothy Ash said.

“We are seeing policy adjustment,” he said, adding that would eventually help the inflation.

Bartosz Sawicki, market analyst at Conotoxia fintech, however said given severe and deeply rooted internal and external imbalances, the post-election policy mix would likely fail to re-anchor inflation expectations and spur significant foreign capital inflows.

“Rising inflation combined with President Tayyip Erdogan’s impatience and disregard for orthodox policies will leave the lira vulnerable,” according to the economist.

The lira was being traded 26.9 against the dollar on Thursday morning. It lost around 30 percent of its value since late May.