Turkish inflation decelerated at its steepest pace in more than a quarter century, a slowdown that may be at risk from a public spending splurge planned ahead of elections.
(Bloomberg) —
Turkish inflation decelerated at its steepest pace in more than a quarter century, a slowdown that may be at risk from a public spending splurge planned ahead of elections.
Consumer prices rose an annual 64.3% in December, down from 84.4% the previous month, according to data released by state statistics agency TurkStat on Tuesday. The median forecast of economists surveyed by Bloomberg was 66.7%.
Much of the slowdown reflects a base effect from fast price increases in the last month of 2021, when the lira lost nearly a fifth of its value within days, making imports more expensive. Subdued credit growth and a relatively stable currency since then have led policy makers to expect inflation at 22.3% by the end of this year.
Increases in the cost of food, energy and factory-gate prices all slowed to rates below 100%. That’s signalling “a visible downward trend” that allowed the government to meet targets in its medium-term program, according to Treasury and Finance Minister Nureddin Nebati.
But the improvement is set to lose momentum as the government prepares to ramp up spending ahead of presidential elections scheduled to take place in June.
On a monthly basis, inflation rose 1.18% in December. Core prices, which exclude volatile items such as food and energy, rose 51.93%.
With that stickiness in prices, many economists expect inflation to end the year at 44%, more than three times the average of 15 peers tracked by Bloomberg across Europe, the Middle East and Africa.
What Bloomberg Economics Says…
“Turkey’s rampant inflation has taken a large step down due to high base effects that will keep the rate receding through 2023. Even with expectations for a sharp fall in the year-on-year rate, December inflation still surprised to the downside at 64.3%. We expect the year-end inflation rate to remain above 30% — six times the central bank’s target rate of 5%. Still, we do not see the central bank combating high price gains with policy rate hikes until after this year’s elections — once the vote is out of the way, the build-up of risk in the economy is anticipated to call for a policy reversal.”
— Selva Bahar Baziki, economist. Click here to read more.
President Recep Tayyip Erdogan last month promised early retirement for millions of workers in a pre-election pledge that’s likely to cost the Turkish Treasury around $13 billion a year.
The government also announced a 55% raise for the official minimum wage and is preparing to inject $3.3 billion into state banks to accelerate cheap lending to help businesses cope with risings costs.
The Turkish leader sees lower borrowing costs as key to his ambitions to boost investments and job creation ahead of the elections. Under his explicit guidance, Governor Sahap Kavcioglu lowered the central bank’s key interest rate by a total of 500 basis points to 9% in November.
While delivering four consecutive rate cuts, Kavcioglu blamed rampant inflation on high energy prices and a weak currency that fueled import costs.
The governor will present his next quarterly report on inflation outlook on Jan. 26 and will write an open letter to the government explaining why he missed the official target rate of 5%.
“We still need to take into account the planned surge in public spending before the elections, which may feed periodical price increases,” Istanbul-based Tera Yatirim’s chief economist Enver Erkan said. “Overall demand and a desire by companies to pass on rising costs will effect future price hikes.”
–With assistance from Joel Rinneby.
(Updates with chart, fourth and fifth paragraphs, and economist comments.)
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