Turkey’s Inflation Set to Slow Before Election Spending Kicks in
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Turkish consumer inflation probably fell at the steepest pace in nearly 28 years, but public spending ahead of elections is set to keep price gains among the world’s highest.
Consumer prices rose an annual 66.7% in December, down from 84.4% the previous month, according to the median prediction in a Bloomberg survey of analysts before Tuesday’s inflation release.
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.
But the improvement is set to lose momentum as the government prepares to ramp up public spending ahead of presidential elections scheduled to take place in June.
“Wage increases, an early retirement pledge for millions of private-sector employees and an expected expansion in credit will result in strong domestic demand in the first half of this year, keeping monthly price increases high,” said Enver Erkan, Tera Yatirim’s chief economist in Istanbul.
Sticky Core
Another Bloomberg survey predicts core prices excluding volatile items such as food and energy probably rose 53.6% through 2022.
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...
“Expansionary government spending and credit policies ahead of elections in mid-2023 will boost demand and keep inflation high. The recently announced Treasury-backed funding scheme will likely add $13.4 billion to the current lira-based corporate loan stock, expanding it by more than 7%. This takes our year-end inflation estimate for 2023 to about 30%, six times the central bank’s official target rate.”
— 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 presidential elections. Under his explicit guidance, Governor Sahap Kavcioglu lowered the central bank’s policy 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%.
--With assistance from Joel Rinneby.
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