Turkey has seen prices rise and rates not seen for twenty-five years with the Turkish Lira collapse sending imported goods sky high. Turkish annual inflation accelerated for a 13th straight month to 78.6% in June. Staples such as transportation and food are rising at an even faster rate. Energy prices soared 151.3% from a year earlier, while food inflation reached almost 94%. The International Monetary Fund estimates Turkey will have the world’s highest inflation this year after Venezuela, Sudan and Zimbabwe.
The Turkish central bank just over two months ago predicted inflation could already start slowing as early as June, hasn’t raised policy interest rates in over a year after a round of monetary easing in late 2021. This has been at the direction of President Erdogan who said in the past he was “saddened” that Turks had to face such high inflation levels and pledged to bring it down to single digits as soon as possible.
Ahead of the elections scheduled for next June, Erdogan on Friday announced an interim increase in the minimum wage for the first time in six years, raising pay by nearly 30%. Turkey already boosted its minimum wage by a record 50.5% in January.
Declines in the lira against the dollar continued in June, adding to this year’s worst performance in emerging markets that’s stoking inflation.
Turkey’s lira had collapsed after Turkey’s central bank lowered the benchmark by 500 basis points since September late last year. The cuts drove down the lira, which weakened per dollar for the first time over 17 to a record low of 18.4 as the central bank of Turkey slashed interest rates under a drive by Erdogan to prioritize credit and exports over currency and price stability.
On December 20 with the Turkish Lira in freefall Turkey’s President Recep Tayyip Erdogan announced extraordinary measures to save it from the depths. Turkey introduced a new program that will protect savings from the prices moves and gave the TRY a reprieve. The lira collapse accelerated with Turkey Central Bank sharp rate cuts. Erdogan vows to win his so called “economic war of independence”. With Turks not affording bare necessities as inflation runs rampant from the collapsed currency and elections in sight push has come to shove.
The chart below shows how bad it was before the latest surge inflation.
Back then Reuters reported that some economists predict inflation could reach as high as 50% by spring unless the direction of monetary policy is reversed. Goldman Sachs said it would remain above 40% for most of the year ahead.
“Rates should be immediately and aggressively hiked because this is urgent,” said Ozlem Derici Sengul, founding partner at Spinn Consulting in Istanbul.
The central bank was however unlikely to act, she added, and annual inflation “will probably reach 40-50% by March”, by when administered price rises would have been added into the mix, including a 50% minimum wage hike. Reuters
Back then the weak Lira Turkey’s trade data was showing signs of the J curve impact. Exports surged by a third to $225 billion last year. Erdogan took time to comment on the move, “We have only one concern: exports, exports and exports,” he said in a speech.
Now the situation has got even more desperate. “Assuming no major FX depreciation in the rest of the year,” annual inflation may peak in October at about 88% on an annual basis and end the year at 67%, Barclays Plc economist Ercan Erguzel said in a report today.
The lira slightly weakened after the inflation report and was trading down 0.5% at 16.8347 against the dollar at 3:49 p.m. Istanbul. Should the Turkish currency reach 25 per greenback by year-end, annual inflation could peak at 97% in October, according to Barclays.
Where to now Mr Erdogan?
Source: Reuters Bloomberg
From The TradersCommunity News Desk