Inflation in Turkey nears 70% in March and more rate hikes expected

Inflation in Turkey accelerated in March to 68.5% year-on-year from the 65.7% expansion in February, according to what was published this Wednesday by the country’s statistics agency Turkstat. On the other hand, annual inflation slowed to 3.16%, from 4.5% in the previous month and registered its lowest reading since December.

The increase in the cost of life continues to upset the Erdogan administration who last Sunday suffered a severe setback, since in the municipal elections his party (AK) suffered a hard blow at the polls, giving victory to secularism. A victory led by the mayor of Istanbul, Ekrem Imamoglu, an image of the resurgence of liberal democracy in the country.

But the truth is that the official calculations are blurred by the group of independent experts of Enagrup, who are in charge of making their own macroeconomic estimates of the country due to the lack of confidence in the official. Specifically, these experts believe that the increase in prices in March was 5.8%, placing a CPI in the country at 124.63%.

Among the main contributors to this annual price increase are services, education and food. The subsequent inflation, which excludes the latter and energy, accelerated to reach its highest level on record: 75.2%, compared to 72.9% in February. Services inflation also accelerated, rising from 94.4% to 96.5%.

While the Central Bank of Turkey (CBRT) expects the inflation rate to end this year at 36%, with an upper band of 42%, according to its latest projections report.

Experts believe that if inflation continues like this it will reach between 73% and 75% in May. The economist Selva Bahar Baziki assured in a comment for Bloomberg that March inflation reading was lower than expected but “it is nothing more than a temporary relief.” The expert assures that looking to the future “we expect inflation to reach 73% in May, followed by a slowdown that takes the rate to 43% at the end of the year.” Even so, it is still eight times higher than what CBRT projected.

For his part, Turkish economist Haluk Burumcekci even predicted that inflation will step on the accelerator to around 75% in May and will subsequently ease to 45% at the end of May “if exchange rates, salaries and commodity prices are not facing another shock,” he said.

Senior researcher at the Elcano Institute, Judith Arnal, assured elEconomista.es that right now “we have to see what happens with the lira and energy prices.” But the expert assured that “time must be given” since the Erdogan administration made an important 50% minimum wage increase “and this is something that favors the growth of inflation.” Therefore, the expert stressed that right now “you have to give time” for the “restrictive tone” to operate, she said, that CBRT currently has.

The central bank, in fact, surprised the markets by increasing its reference interest rate at 50% at the end of March, amid deteriorating inflation prospects and rising demand for hard currencies. Furthermore, as the researcher said, the bank has promised to maintain a strict stance until prices show visible signs of cooling.

Arnal was quite cautious, as he reiterated that it is possible that Erdogan would turn the situation around economic heterodoxy given the electoral results, although he clarified that “the messages are that they were going to continue on the path of orthodoxy.”

At the same time, it is possible that there will be an adjustment to the minimum wage for the second half of 2024, which will put additional pressure on prices, as Judith Arnal commented. But the counterpart to this is that it has been observed that CBRT responds to this by being stricter for longer. “We believe the authorities will hesitate to raise rates just when inflation is expected to fall sharply over the summer,” Bahar Baziki said.

The economist of Bloomberg He reiterated that his inflation forecasts do not contemplate a review of salaries. If policy deviates from this, “we expect an increase in year-end inflation of about 0.7 percentage points for every 10% increase in the minimum wage,” he argued.

At the same time, he recalled that the risks to the inflation outlook “lean upwards” given a probable review of government policies, an accelerated depreciation of the currency and an escalation of the war in the Middle East.

Still, both Arnal and Baziki hope that, given the deterioration in prices, the CBRT will manage it with stricter policies. The economist of Bloomberg He said that what would help correct the trajectory of inflation It would be a fiscal adjustment and prices regulated by the Government and they believe that in the face of a high-impact risk “it is likely that the CBRT will offer an additional rate.”

The Minister of Finance himself, Mehmet Simsek, assured on his social network account . This, together with the tightening of monetary policy “will anchor the inflation outlook and continue the disinflation process.”

In this sense, Erdogan assured, after admitting his defeat, that he would cling to the orthodox program of his economy minister, which leads one to think that he will not deviate from that path.