Turkey’s cost-of-living crisis in 2022 was so harsh it’s making this year’s decline in inflation look even more stark, emboldening policymakers to consider the interest-rate cuts that stoked consumer prices in the first place.
(Bloomberg) — Turkey’s cost-of-living crisis in 2022 was so harsh it’s making this year’s decline in inflation look even more stark, emboldening policymakers to consider the interest-rate cuts that stoked consumer prices in the first place.
Although months of relative stability in the lira and an easing of global pressures are helping cool off inflation in Turkey, favorable statistical base effects have been among the biggest drags on prices. The comparison with 2022 readings — which were exceptionally high — likely means inflation will stay in decline over the coming months.
After the steepest deceleration in consumer prices in more than a quarter century, data due Friday will show they rose an annual 53.8% last month, down from 64.3% in December, according to the median estimate in a Bloomberg survey of economists.
Keeping inflation in check is crucial for President Recep Tayyip Erdogan as he vies for a third term in elections slated for May, following the worst cost-of-living crisis in two decades.
Read more: Why Turkey’s Next Election Is a Real Test for Erdogan
But in a sign the Turkish leader may not be willing to wait for price increases to stabilize at a low level, Erdogan this week renewed his call for additional rate cuts, claiming again they will bring down inflation. The opposite has been true so far, after the central bank moved to slash borrowing costs even as inflation topped 85% last year.
What Bloomberg Economics Says…
“Tailwinds from the central bank’s accommodative policy stance and expansionary fiscal and credit policies will likely feed into higher prices through the year. We see this contributing to a year-end inflation rate of more than six times the Central Bank of the Republic of Turkey’s target rate of 5%. The central bank’s own monetary policy stance may also present a challenge to the fall in price gains. A renewed chance of policy rate cuts will weaken the lira — even as the central bank continues to intervene in FX markets to support it — and ensure higher inflation.”
— Selva Bahar Baziki, economist. Click here to read more.
Central bank Governor Sahap Kavcioglu has fed speculation that rate cuts are back in play. Under his stewardship, the Monetary Policy Committee in January removed a phrase from its forward guidance that described the current 9% benchmark rate as “adequate.”
Policymakers then said they stood by their projections that forecast inflation will end the year at 22.3%, with Kavcioglu declining to elaborate on the likely path of interest rates.
TURKEY INSIGHT: CBRT Hidden FX Intervention at $108 Billion
With the central bank on the sidelines, the focus of efforts to restrain inflation has been elsewhere.
To keep the lira stable after four rounds of rate cuts between August and November, the central bank spent about $108 billion last year on back-door interventions in the currency market, according to Bloomberg Economics.
The government meanwhile stepped in to defend the purchasing power of consumers by raising wages, offering debt relief and providing cheap loans.
Authorities also told grocery shops to keep costs unchanged throughout January and pledged to take action against “speculative” pricing. Major chains like Migros Ticaret AS and Sok Marketler Ticaret AS quickly obliged.
While the outlook for inflation is improving, the central bank still appears to be overly optimistic. Its own monthly survey of market participants in January put year-end price growth at about 32.5%, or about 10 percentage points above the latest official forecast.
The upbeat expectations may mean a resumption of monetary easing is only a matter of time. The central bank next reviews rates on Feb. 23.
For his part, Erdogan has said inflation will “quickly slow down” and end the year at about 20%.
–With assistance from Joel Rinneby.
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