Turkey’s inflation turnaround is almost over with dive below 50%
Turkey’s inflation probably slowed below 50% for the first time in more than a year and may plateau at that level, with risks for price stability rising as the country goes to the polls this month.
Though authorities have stuck with ultra-loose policies that helped push annual inflation above 85% in 2022, cheaper energy costs and the statistical effect of a high base last year mean prices have been cooling off at a steep pace.
Inflation has almost halved since peaking in October to reach an annual 44.1% last month, down from 50.5% in March, according to the median forecast of economists surveyed by Bloomberg. A separate poll found price growth will hover around 44% this quarter and next before ending the year slightly higher.
Consumer inflation was likely below 45% in April, Treasury and Finance Minister Nureddin Nebati said in a televised speech this week. Turkey’s statistics agency will report the data on Wednesday.
Crucial to the outlook is the outcome of the vote less than two weeks away as President Recep Tayyip Erdogan faces the stiffest challenge of his two decades in power. Under his stewardship, Turkey has pursued an unorthodox approach and slashed interest rates in the belief it would hold back price gains.
Evidence to the contrary has been in plain view for months. And while the headline figure is in decline, core inflation — which strips out volatile items like energy and food — is still running hot in a sign price pressures remain elevated.
Adding to strain on inflation, the government has been ramping fiscal spending after the deadly earthquakes in February and with the approach of elections.
A unified opposition of six political parties has promised that, if elected, it would commit to inflation targeting through a set of more conventional policies and possibly wind down the regulations and backdoor interventions used to steady the lira.
What Bloomberg Economics says…
“The rise in public spending, including post-quake rebuilding, and the central bank’s loose stance, will likely feed into higher price gains. In our view, that will limit the decline in the annual inflation rate, as it offsets the damping impact coming from base effects. We see inflation hovering above 40% for the rest of the year.”
— Selva Bahar Baziki, economist.
On Thursday, central bank governor Sahap Kavcioglu will present this year’s second quarterly inflation report, where he may revise projections for 2023 and 2024.
Policymakers most recently forecast price growth will end this year at 22.3% — more than four times higher than the central bank’s official target — and then slow to 8.8% in 2024.
The lira’s performance could determine much of what happens next, with mounting expectations for a depreciation after the May 14 elections posing a threat to consumer prices. The Turkish currency is among the worst performers in emerging markets so far this year with a drop of almost 4% against the dollar.
“A lira adjustment post-election and potential adjustments in wages and administered prices will likely weigh on inflation momentum,” ING Bank economists including Muhammet Mercan said in a report. BM/DM