Turkey’s Inflation Ends Year Near 65% With Peak Months Away

January 3, 2024 admin-dominor

(Bloomberg) — Turkish inflation came just short of a forecast laid out by the central bank, ending the year with an upswing that keeps it on track to accelerate past 70% by May as new risks emerge.

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Annual price growth quickened to 64.8% in December, according to data released on Wednesday, compared with 62% the previous month and slightly slower than expected by economists surveyed by Bloomberg.

The reading was in line with the outlook drawn up by the central bank and the government, a rarity in a country where official forecasts have often proven to be overly optimistic. The government’s decision to raise the official minimum wage by nearly 50% risks faster price increases than implied by the central bank’s expected inflation path.

Prices are on a trajectory that the central bank has said still warrants further monetary tightening after seven consecutive hikes raised interest rates by 34 percentage points since June. Inflation is ending the second straight year at almost 65% for the first time since the late 1990s.

The monetary authority’s latest outlook doesn’t project a slowdown until the second half of this year and expects inflation to end 2024 at 36% — still more than seven times the official target. Governor Hafize Gaye Erkan will present fresh estimates in February.

Policymakers previously warned that domestic demand, along with “stickiness in services inflation,” were among the main factors behind broader price pressures. In December, restaurant and hotel prices surged 93% in annual terms, while overall services inflation nearly hit 91%.

Read more: Turkey’s 49% Minimum Wage Hike Balances Between Unions, Markets

The government’s decision to raise the minimum wage by 49% this year could be another driver of prices this year, with some Wall Street banks warning it requires tighter monetary policy in response.

What Bloomberg Economics Says…

“The slower-than-expected pick-up in Turkey’s December CPI rate will do little to ease the inflation pain ahead. Price gains remain on target to leap past 70% in May, with the deceleration that follows set to be a drawn-out process despite the central bank’s tight stance.”

— Selva Bahar Baziki, economist. Click here to read more.

Under Erkan, appointed in June, the central bank has looked to repair credibility with financial markets in part by issuing more realistic forecasts for inflation. It’s a change from the upbeat assessments usually offered by her immediate predecessor, whose policy decisions took little account of inflation.

Signs have emerged of cooling momentum for prices. A monthly gauge preferred by Finance Minister Mehmet Simsek showed inflation was 2.9% in December from November, the slowest reading since May.

“Monthly inflation could continue slowing given a controlled exchange rate, lack of another shock in wages, managed prices and commodity costs,” Istanbul-based economist Haluk Burumcekci said after the data release.

In the months ahead, commodity prices — especially oil — will be one of the main determining factors for inflation, he added.

Official borrowing costs remain deeply negative when adjusted for current inflation. And core inflation — which strips out volatile food and energy items — accelerated past 70% from a year earlier.

Still, most economists predict the central bank’s cycle of rate hikes will end when the benchmark rises to 45% later this year, from 42.5%. Policymakers have said that interest rates should be viewed relative to their end-2024 inflation projection.

Hakan Aran, chief executive officer of Turkish lender Isbank, said he’s “optimistic about inflation” and that a monthly price growth of 3% or under would bring year-end inflation to the central bank’s forecast.

“It’ll be a year that the central bank will match targets,” Aran said in Istanbul.

–With assistance from Baris Balci and Asli Kandemir.

(Updates with chart, economist comments starting in 10th paragraph.)