Turkey Inflation Accelerates in May on Weak Currency

(Bloomberg) -- Turkey’s consumer inflation accelerated to the highest level in six months ahead of a landmark presidential election, fueled by a slump in the lira that triggered an emergency hike in interest rates.

The annual inflation rate rose to 12.2 percent in May from 10.9 percent the previous month, matching the median estimate in a Bloomberg survey. Turkey’s state statistics office said monthly inflation was 1.6 percent, in line with the median estimate in a separate survey. The lira gained.

The central bank stepped in to arrest the decline in the lira after it had shed more than a fifth of its value against the dollar this year. At an extraordinary meeting May 23, Governor Murat Cetinkaya and his policy committee boosted borrowing costs by 300 basis points. They then announced an overhaul of rate policy that included doubling the one-week repo, which became the new benchmark. Cetinkaya is said to have told investors last week that further tightening was possible if the inflation outlook worsened.

The inflation number “will leave the central bank very little wiggle room at its next monetary policy meeting (June 7) now not to hike again,” BlueBay Asset Management strategist Timothy Ash said in an emailed note. “Anything less and I think they will leave themselves very vulnerable.”

Sakir Turan, an Istanbul-based economist at Odeabank, said the bank might raise rates as much as 100 basis points. However, Capital Economics economist Jason Tuvey said “past experience suggests that pressure from President Recep Tayyip Erdogan to keep interest rates down means that the central bank is unlikely to react to today’s figures,” even if they support a rate rise.

Prior to the emergency rate increase, the bank had been criticized for not taking action to support the currency, whose depreciation feeds into prices, mainly through the cost of imported goods.

Lira volatility picked up after Erdogan said in a Bloomberg TV interview last month that he intends to tighten his grip on the economy and take more responsibility for monetary policy if he wins the country’s June 24 election. The poll will cap Turkey’s transition from a parliamentary democracy to a powerful executive presidency.

Below are some of the highlights from Monday’s inflation report:

  • The energy index, which tracks the price of power and refined oil products, rose 15.2 percent from the previous year, compared with 12 percent in April
  • Core inflation, which excludes volatile items such as gold and energy, accelerated 12.6 percent, compared with 12.2 percent the month before
  • Food prices, which make up nearly a quarter of the consumer inflation basket, rose an annual 11 percent, up from 8.8 percent

The currency was 0.2 percent stronger after the inflation report, trading at 4.6363 per dollar at 11:13 a.m. in Istanbul.

©2018 Bloomberg L.P.