Turkish inflation has hit its highest level in more than two years after the easing of pandemic restrictions last month boosted consumer spending, complicating efforts by the central bank to comply with President Recep Tayyip Erdogan’s demand to cut interest rates.
Consumer prices rose 17.5 per cent in June on an annual basis — the highest rate since May 2019 and well above the 16.8 per cent forecast by analysts polled by Bloomberg. Home furnishings, food and beverages and hospitality all drove the pace of price growth upwards, official statistics showed.
Erdogan, who has called himself the “enemy” of interest rates, has in recent weeks renewed his call for the central bank to cut the cost of finance, saying he expects a reduction in July or August. He sacked the previous central bank governor in March after he increased rates by two percentage points; that unnerved investors and the lira has since fallen more than 15 per cent.
The new governor Sahap Kavcioglu, who shares Erdogan’s unconventional view that high rates drive inflation, has sought to allay investors’ worries that he will ease monetary policy prematurely. He has pledged to keep Turkey’s benchmark rate above inflation, and has held it at 19 per cent in the past three rate-setting meetings. The monetary policy committee is due to meet again next week.
“In an ideal world, with an orthodox central bank that wants to bring down inflation, it would almost certainly be raising interest rates. But this is Turkey’s central bank, which is subject to political influence that has a heavy sway over policymaking,” said Jason Tuvey, an emerging markets economist at Capital Economics.
Erdogan wants lower interest rates to encourage more borrowing in an effort to stimulate the economy, which expanded 7 per cent year-on-year in the first quarter of 2021.
However Turkey’s economic recovery from the impact of the pandemic has failed to dent unemployment, which remains high at 14 per cent. Voters’ unhappiness with the economy has triggered a record decline in support for Erdogan’s ruling party.
“Politically he is in quite a lot of trouble, as opinion polls suggest his popularity is waning. He may see the way to boosting that is faster growth and creating more jobs. But Turkey is already experiencing one of the faster recoveries from the [coronavirus] crisis,” said Tuvey.
Turkey’s coronavirus cases have declined to about 4,400 a day and it has lifted a partial lockdown and allowed restaurants and other businesses to reopen after stepping up its vaccine rollout.
Analysts expect that Kavcioglu will struggle to cut interest rates in the coming months as inflation is not expected to cool, in part because the government increased electricity and gas prices this month.
“July [prices] look to be even higher, given energy price hikes announced this past week. All this makes the central bank’s forecast of 12.2 per cent inflation at year-end appear very optimistic,” Timothy Ash, a strategist at BlueBay Asset Management, wrote in a note to clients.