Turkey Braced for Inflation Jump in Test for Peak Interest Rates

Baris Balci
·3 min read
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(Bloomberg) -- Turkish monthly inflation in January probably jumped the most since the summer, an acceleration that could test the new central bank chief’s resolve after his predecessor announced the end of a tightening cycle.

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On the back of a sharp increase in the minimum wage and government tax adjustments, data due Monday will probably show price gains in January from a month earlier quickened to 6.5% after five consecutive monthly declines, according to the median forecast in a Bloomberg poll of economists.

A separate survey showed annual price growth dropped slightly, to 64.6% from 64.8% the previous month.

Turkey’s Central Bank Governor Hafize Gaye Erkan resigned abruptly late Friday, just eight months after being appointed as part of a new economic team charged with leading a dramatic pivot in economic policy. President Recep Tayyip Erdogan quickly appointed Deputy Governor Fatih Karahan to replace her, signaling a continuation of the transition to more investor-friendly, orthodox economic policies.

Read More: Turkey Names Ex-NY Fed Economist as New Central Bank Chief

After Erkan’s removal, Treasury and Finance Minister Mehmet Simsek said in a statement that the president “has full confidence and support in our economy team and our program.”

The central bank recently increased interest rates to 45% after an extensive tightening cycle under Erkan, a reversal of the unorthodox policy of keeping borrowing costs low previously favored by Erdogan.

The change of the governor and stickier inflation opened room for more interest-rate hikes, Deutsche Bank AG strategists including Christian Wietoska wrote in note over the weekend.

January’s data will be key to determining whether inflation stays on the central bank’s projected path. If monthly prices significantly surpass analysts’ expectations, it may prompt an upward revision of forecasts and potentially a review of rate policy. Karahan is expected to lay out new year-end inflation estimates on Feb. 8.

The central bank expects monthly price increases to slow in February and beyond but also cites domestic demand and geopolitical risks as reasons inflation will remain stubbornly high.

Local elections at the end of March may also pose a risk to price expectations due to associated increases in public spending. Turkey’s central bank has pledged to reassess monetary policy if notable and persistent risks to inflation emerge.

What Bloomberg Economics Says...

“Turkey’s annual inflation will likely tread sideways in January, with favorable base effects in the comparison period masking a large move in monthly price gains. We expect inflation to pick up pace going forward, with risks to this outlook heavily tilted to the upside. The central bank is likely to manage these risks with tightening via alternative tools rather than further interest rate hikes. ”

— Selva Bahar Baziki, economist. Click here to read more.

January inflation will have a spillover effect on subsequent months, according to Selva Demiralp, a professor of economics at Istanbul’s Koc University, who estimates price growth at 49% by the end of the year.

“Notable and persistent risks have already emerged, and more tightening will be needed if the central bank is sincere about meeting its 36% year-end estimate,” she said.

One key area of concern is the services sector. Monthly retail price growth in Istanbul, Turkey’s most populous city, was 6.7% last month, driven by over 20% increases in sectors like health and transportation.

The central bank says some services - including rent, education and health - will prompt inflationary effects to persist.

The statistical effect of a high base from 2023 will likely put the brakes on inflation over the summer, especially if policymakers keep the lira’s depreciation in check. Annual price measures may see declines of about 10 percentage points each month in July and August, Bloomberg Economics estimates.

“The central bank may consider rate cuts as inflation declines due to the base effect in the second half of the year,” Ibrahim Aksoy, chief economist at HSBC Asset Management in Istanbul, said in a note on Friday.

--With assistance from Beril Akman and Joel Rinneby.

(Updates with DB report in seventh paragraph.)

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