Inflation in Turkey hits record 48.7% following interest rate cuts

Turkey’s inflation accelerated to the highest in almost 20 years in January, making it tougher for the central bank to heed President Recep Tayyip Erdogan’s push for lower borrowing costs.

Consumer price inflation surged for an eighth straight month to reach an annual 48.7%, the highest since April 2002 and up sharply from 36.1% in December. The figure, which was driven by rising energy and food prices and a weak lira, slightly exceeded the 48% median estimate in a Bloomberg survey of 19 analysts. 

Turkey’s central bank has slashed its benchmark interest rate by 500 basis points since September in a series of moves encouraged by Erdogan, who has attacked elevated borrowing costs as a challenge for businesses and a brake on economic growth. 

The cuts have pushed the official rate to around negative 35% when adjusted for annual inflation, the lowest real yield across emerging markets, and sent the lira into a tailspin that’s accelerated consumer price rises. Global pressures, including a surge in the price of gas and other commodities, exacerbated price increases in January and have also cast a pall over the medium-term inflation outlook. 

Turkey’s central bank held rates steady in January as prices soared but Erdogan, who espouses the unorthodox view that higher interest rates fuel inflation, signaled last week that he had no intention of abandoning his overall policy trajectory.

That’s frustrated investors who have dumped the lira and complained that Turkey’s monetary policy has become unpredictable, driven more by Erdogan’s policy whims than economic fundamentals.  

“I think the central bank will be forced to hike, whether they like it or not,” said Cristian Maggio, head of portfolio strategy at TD Securities. “However, I cannot rule out an attempt to ease further before they are forced to U-turn,” he said. “Sure enough CPI at around 50% is a total failure by the central bank.”

The lira, which slid over 44% last year, was trading lower at 0.7% lower at 13.5607 per dollar as of 10:49 a.m. in Istanbul.

January is traditionally a high inflation month in Turkey as cold weather adds pressure on food prices and the government adjusts some taxes according to inflation rates recorded the previous year. This time, higher energy prices and household utility costs also took their toll. 

The rate of inflation in energy rose to 76.38% from 42.93% in December. The government unveiled historic increases of as much as 130% in the price of household electricity in January.

The price of benchmark Brent crude, an indicator of corporate Turkey’s energy bills, hovered around a seven-year high in January, prompting analysts to raise their producer price estimates to near triple digits on an annual basis. 

Utility companies have also begun to pass higher energy costs on to consumers, with the government unveiling historic increases in the price of household electricity. Annual retail inflation in Istanbul, the biggest city and commercial capital of Turkey, reached 50.91% in January, jumping from 34.18% a month earlier.

The central bank governor Sahap Kavcioglu has said that support for the local currency would be a key objective this year but has shown little sign this would involve a tighter monetary policy stance. The central bank is hoping to curb price growth by taking measures to encourage de-dollarization. 

The surge in commodity prices will continue adding to inflationary pressure, according to Istanbul Analytics economist Guldem Atabay. “The pass through from producers’ price inflation will push the annual consumer inflation to 55-60% levels swiftly by the end of first quarter” she said before the data.

Turkey’s central bank will release current account data for both December and full year 2021 on Feb. 11. Kavcioglu will chair the next rate-setting meeting on Feb. 17.