Turkey’s inflation reaches its highest level in more than two years

The relaxation of pandemic restrictions last month boosted consumer spending, complicating efforts by the Turkish Central Bank to meet President Recep Tayyip Erdogan’s interest rate cut request Since then, Turkey’s inflation rate has reached its highest level in more than two years.

Consumer prices rose at an annual rate of 17.5% in June, the highest level since May 2019, and much higher than the 16.8% forecast by analysts surveyed by Bloomberg. Official statistics show that the household, food and beverage, and hotel industries have all contributed to the pace of price increases.

Erdogan, who claims to be the “enemy” of interest rates, has again called on the central bank to cut financing costs in recent weeks, saying that he expects to cut interest rates in July or August. After raising interest rates by two percentage points, he fired the former central bank governor in March; what disturbs investors is that the lira has fallen by more than 15% since then.

The new governor Sahap Kavcioglu shares Erdogan’s unconventional views about high interest rates driving inflation, and he tries to allay investors’ concerns that he will loosen monetary policy prematurely. He promised to keep Turkey’s benchmark interest rate above inflation and to keep it at 19% in the past three interest rate setting meetings. The Monetary Policy Committee is scheduled to meet again next week.

“In an ideal world, if the orthodox central bank wants to reduce inflation, it will almost certainly raise interest rates. But this is the central bank of Turkey. It is politically influenced and has a significant impact on policy making,” Capital Economics Emerging Markets Economics The scientist Jason Tuwei said.

Erdogan hopes to lower interest rates to encourage more borrowing to stimulate the economy, which will grow by 7% year-on-year in the first quarter of 2021.

However, Turkey’s economic recovery from the effects of the pandemic failed to reduce the unemployment rate, which is still as high as 14%. Voters’ dissatisfaction with the economy has led to a record drop in support for Erdogan’s ruling party.

“He has a lot of trouble politically because opinion polls show that his popularity is declining. He may see ways to accelerate growth and create more jobs. But Turkey has already experienced a faster recovery from the economic crisis. One of the countries. [coronavirus] Crisis,” Tuwei said.

The number of coronavirus cases in Turkey has dropped to about 4,400 per day. Part of the lockdown has been lifted, and restaurants and other businesses have been allowed to reopen after intensifying vaccine promotion.

Analysts expect it will be difficult for Kravsioglu to cut interest rates in the next few months because inflation is not expected to cool, partly because the government raised electricity and natural gas prices this month.

“July [prices] Considering the increase in energy prices announced last week, it looks even higher. All of this makes the central bank’s forecast of 12.2% inflation at the end of the year very optimistic,” BlueBay Asset Management strategist Timothy Ash wrote in a report to clients.

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