Turkey’s inflation rate surged to a staggering 75.5% in May, exceeding forecasts and marking a critical point in a prolonged cost-of-living crisis. This acceleration from just under 70% in April suggests that the peak of the crisis might be in sight, according to government officials.
Data released on Monday revealed that monthly price growth, which is closely monitored by the central bank, also rose to 3.4%. Both metrics surpassed median predictions from economists.
“Annual inflation reached its cyclical peak in May,” noted Muhammet Mercan, ING Bank’s chief economist for Turkey. This trend aligns with the central bank’s projections, which have adhered to more traditional economic policies since President Recep Tayyip Erdogan’s re-election a year ago. The focus now shifts to whether inflation will follow the forecasted downward trajectory, paving the way for potential interest rate reductions following a period of intense monetary tightening. Policymakers forecast that Turkey’s inflation will fall to 38% by year-end, positioning it as the sixth-highest globally according to the International Monetary Fund.
“The worst is behind us,” Turkish Finance Minister Mehmet Simsek announced on social media platform X. He projected that permanent declines in inflation would start in June, potentially bringing the rate below 50% by the end of the third quarter.
There are emerging signs of easing inflationary pressures. The Istanbul Chamber of Industry and S&P Global’s measure of Turkish manufacturing activity fell below the 50-mark, indicating contraction rather than expansion. Both input costs and output prices rose at a slower rate in May compared to April, as per a report released on Monday.
Although the central bank has kept official borrowing costs unchanged for the last two meetings, it has implemented measures to curb loan growth and remove excess liquidity from the market to maintain restrictive financial conditions. A significant deviation from the projected inflation outlook could prompt another rate hike. This comes after a cumulative increase of over 40 percentage points in less than a year, bringing the benchmark rate to 50% in March.
“Challenges such as pricing behavior and the rigidity in services inflation will persist,” Mercan stated. “The Turkish central bank will closely monitor the inflation trajectory and expectations.”
Looking ahead, fiscal adjustments by the government will play a crucial role in complementing the monetary tightening and influencing inflation in the coming months. The momentum towards lower inflation will also affect investor interest in Turkish assets, which have seen a recent surge in foreign inflows. In May alone, lira bonds attracted a record $6.5 billion in foreign capital, while Turkish stocks have gained 30% in dollar terms this year, ranking among the top-performing equity markets globally.
Greater fiscal discipline and continued tight monetary policy are expected to boost interest in local government bonds, provided there is a sustained improvement in inflation expectations, according to Tufan Comert, director of global markets strategy at BBVA in London.
Leave feedback about this