Turkey: Inflation well above interest rates

Turkey’s spiral of inflation in the axis of external factors and internal pricing developments continues. Accordingly, we expect the upward trend in May inflation to be announced and reach 72.5%. Faced with the highest inflation rates since 2002, the rise of the Turkish economy, which reminds of the triple-digit inflation rates last seen in 1998, has gained momentum in recent months. On the other hand, it is seen that the government and the economy administration do not want to increase interest rates at a point where they prioritize growth targets and the implementation of the new economic model.

Inflation will not trigger a rate hike at the central bank. Inflation reached 70% in April, 56 points above the benchmark policy rate. As a result of the expected increase in inflation in May and the lack of monetary policy against it, the negative real interest rate effect will deepen even more and will continue to be the lowest among the major emerging markets.

Inflation is likely to rise further in May due to rising commodity prices and weak lira. The high price effect will continue to be observed due to reasons such as exchange rate, domestic pricing factors, oil and commodity prices, demand-side movements caused by deteriorating inflation expectations and central price adjustments. We will also monitor the direct and diffuse effects of the latest energy, natural gas, electricity and food prices on June inflation.

The deterioration in inflation expectations continues. Instability and volatility in inflation also affect future expectations such as 12-24 months. With the recent developments, agricultural input inflation is increasing at full speed. In addition to factors such as drought and climate change, which adversely affected the previous supply conditions, the Russia-Ukraine war, which negatively affected grain trade on a global basis, and the implementation of protective measures by many countries in terms of supply security do not indicate a very positive situation in terms of global food inflation. The effects of oil prices and the extremely loose economic and monetary policy in the country show that inflationary pressure will be felt intensely in the goods and services groups.

The central bank raised its year-end inflation forecast to 42.8% in April. Our projections for the coming years and this year point to higher expectations for inflation. The medium-term target, which is seen as 5% beyond 2024, still remains very optimistic due to current dynamics, economic structure, import costs, broad policy implementations and inflation inertia. The central bank chose not to raise interest rates at its meeting on May 26. We do not expect them to raise interest rates at the next June meeting.

The government, on the other hand, favors low interest rates to support economic growth, and does not believe that high interest rates can prevent high inflation. On this basis, macroprudential measures in the fight against inflation, TRY-based financial products to compensate for the increase in exchange rates, regulations against foreign exchange and price control mechanisms are adopted. We think that these economic practices are insufficient to eliminate the root causes of inflation.

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