After a yearlong rally, Turkey’s inflation declines

For the first time in more than a year and a half, Turkey’s inflation rate decreased, however steps to boost the country’s economy ahead of the 2023 elections could keep it high for a while. Data published on December 5 showed that annual consumer price growth decreased in November from the previous month’s 85.5% to 84.4%. According to a Bloomberg study, the average economist’s prediction was 84.8%.

Even while inflation is still very close to becoming the quickest since 1998, the statistical impact of a high base from a year earlier and two months of more stable exchange rates in Turkey are beginning to assist limit price rises. Price growth for the month of November was 2.9%.

Price hikes, rising commodity prices, and the Russia-Ukraine war

Turkey adopted policies that favoured economic development and inexpensive credit at the cost of the currency and price stability, and as a result, inflation this year hit its highest level since President Recep Tayyip Erdogan assumed office almost 20 years ago. The rapid price hikes have been attributed by officials to rising commodity prices, which are partially due to Russia’s invasion of Ukraine, as well as other outside causes. Not to mention the recent Turkey earthquake.

Erdogan has repeatedly reiterated his unusual belief that reduced borrowing rates have the ability to cut prices, even if inflation is rising later than first anticipated by the government. He has pushed the central bank to lower its benchmark rate into the single digits, a target it attained in late November with its fourth consecutive drop, which lowered the main interest rate to 9%.

As a consequence, when taking prices into account, Turkey has among the world’s deepest negative rates. However, as a self-described “enemy” of interest rates, the president has already made it clear that the nation would continue to pursue an ultra-loose monetary policy.

Decline in inflation

Inflation’s decreasing trend, mostly as a result of base effects, is anticipated to be felt significantly in the next months, according to Treasury and Finance Minister Nureddin Nebati on Twitter.

The way the crisis warps pricing expectations may be what causes the crisis’s longer-term harm. According to a central bank poll conducted in November, respondents believe inflation would reach 68% by year’s end of 2022 and will be close to 21% two years from now. An optimistic outlook is held by the central bank. 13 times higher than its stated aim, it projects that consumer inflation will conclude this year at over 65%.

In reaction to indications of an economic downturn, according to governor Sahap Kavcioglu, interest rates were reduced. To limit loan growth and encourage more usage of the lira, he has mostly used on indirect strategies.

If the government increases its stimulus spending before the election, which is only months away, consumer prices may once again be under pressure. In December, it’s believed that the much-awaited minimum wage rise will be made public.

According to Marek Drimal, a strategist for Societe Generale, “the underlying patterns remain troubling although annual inflation will decrease owing to base effects — connected to the lira’s plunge a year ago.” On our forecast horizon, we don’t see inflation returning to levels that are even close to the central bank’s objective.

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