Turkey's inflation hits 75.45%, highest since November 2022

Inflation in Turkey reached 75.45% in May. Experts had expected a reading of 74.8%. As noted by an analyst Bartosz Sawicki, this marks the highest level since November 2022.

The immediate cause of the spike in CPI dynamics is the removal of gas bill subsidies and the effects of the statistical base. However, Turkey's broader inflation problems stem from years of extremely loose monetary policy and fiscal recklessness, which has led to an overheating economy and the collapse of the lira, writes the commentary's author.

"President Recep Erdogan allowed a 180-degree policy shift only after securing re-election in May 2023 and has since adopted a more conventional approach. Interest rates have been raised from 8.5% to 50%. The monetary authorities believe that the March resumption of the rate hike cycle and the increase in the cost of money by 5 percentage points will suffice to control inflation," indicates the analyst.

As Sawicki notes, Turkish authorities believe the radical tightening of policy is beginning to yield results. The slowing momentum of price pressure is seen as a positive sign.

In May, the CPI dynamics fell below 3.5% for the third consecutive month. From June onwards, year-over-year inflation is expected to plummet due to statistical effects. As a result, no further rate hikes are expected, and the next change should be a rate cut. The timing of easing remains debatable, states Bartosz Sawicki.

Years of enforcing an extremely loose policy by the ruling camp and maintaining negative real rates have led to dangerous macroeconomic imbalances and the lira's collapse, depreciating by approximately 40% in the past twelve months. In an overheating economy, the problem of inflation returns persistently. In this light, the commentary suggests that the central bank's projections appear overly optimistic.

Official forecasts suggest a drop in inflation to 38% y/y by the end of the year. The market consensus assumes that in the fourth quarter, the rate of price growth will remain above 40%.

Sawicki notes that the pace of disinflation will not only determine whether rates in Turkey are cut at the end of the year.

"This is key to improving investor sentiment, intensifying capital inflows, recovering foreign exchange reserves, and consequently ensuring the stability of the lira. The March policy tightening through rate hikes and the use of additional tools to reduce liquidity in the financial system has allowed for the stabilization of the Turkish currency at a historical low," he writes.

The USD/TRY rate still exceeds 32, and Cinkciarz.pl sees the risk of the lira gradually losing another 8% in the second half of 2024.