06/07/2023

Turkey’s inflation challenges persist amid lira’s struggles

ANKARA — Turkey is grappling with persistent inflationary pressures as its currency, the lira, continues to face significant challenges. Despite efforts to stabilize prices, the recent depreciation of the lira has exacerbated the problem, making imports more expensive. The country’s struggle with inflation comes at a time when the government is implementing measures such as increasing the minimum wage and considering raising civil servant pay and pensions. As Turkey navigates this economic landscape, policymakers face the daunting task of striking a balance between price stability and economic growth.

Official data released on Wednesday revealed that Turkey experienced the smallest deceleration in consumer prices since November, with inflation reaching 38.2% in June compared to a year earlier. Although this figure was slightly lower than anticipated and down from May’s 39.6%, it remains significantly above the government’s target. Additionally, core inflation, which excludes volatile items, rose to 47.3% year-on-year, indicating persistent price pressures.

The sharp decline of the lira against the dollar has contributed to the inflationary environment in Turkey. Since President Recep Tayyip Erdogan’s re-election victory in May and subsequent changes in the economy team, the lira has lost approximately 25% of its value. This significant depreciation has made imports more expensive, leading to increased price pressures within the domestic economy. Bartosz Sawicki, a market analyst at fintech Conotoxia, attributes the rise in core inflation to the substantial collapse of the lira, calling it one of the most severe in the last decade.

The current economic situation presents challenges for newly appointed Finance Minister Mehmet Simsek and central bank Governor Hafize Gaye Erkan. The task of unwinding complex regulations and fringe policies that previously helped stabilize the lira while also addressing inflationary pressures demands a delicate balance. Both policymakers have signaled a gradual shift toward a more conventional approach, including reducing support for the lira and raising interest rates for the first time in over two years.

Analysts anticipate that inflation will continue to accelerate in the coming months, potentially surpassing 40% and persisting throughout the first half of 2024. Bloomberg Economics revised its year-end projection to 47%, more than nine times the official target. The central bank, which recently raised the benchmark interest rate to 15% from 8.5%, has acknowledged the threat of an inflation spiral and the need for a tighter monetary policy. Despite the conservative approach, the decision to increase interest rates fell short of some expectations.

On 27 July, central bank Governor Hafize Gaye Erkan will present the third annual quarterly inflation report, shedding further light on Turkey’s economic outlook. The next interest-rate setting meeting is scheduled for 20 July, providing an opportunity for policymakers to assess the evolving situation and determine appropriate measures to tackle inflation.