Turkish Inflation Is Moving Closer to Peak With Upswing Near 70%

(Bloomberg) -- Turkish consumer prices probably grew at the fastest in over a year, as generous fiscal policies such as minimum wage hikes keep inflation pressures elevated despite a rapid cycle of monetary tightening.

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Even a month of relative lira stability after local elections in March is so far failing to reverse a deterioration in inflation expectations that’s emerged as a major obstacle to a price cooldown. Annual inflation, which has picked up every month but one since July, accelerated again in April to hit 70%, according to the median forecast of economists surveyed by Blooomberg.

Monthly price growth, the gauge preferred by the central bank, likely quickened for the first time since January and reached 3.4% in April, another poll showed. Turkey’s statistics service is due to publish the data on Friday.

Though Turkey is approaching the peak of inflation, lingering threats to the outlook explain why the central bank is likely months away from starting to cut official borrowing costs that went up by 4,150 basis points since last June. Policymakers led by Governor Fatih Karahan pointed to risks such as stickiness in services inflation and geopolitical worries in holding their key interest rate at 50% last week for the second time this year.

Investors are scrutinizing progress being made by Turkey in getting a handle on inflation to time a return to a country whose local bonds were once a magnet for foreigners. Inflows have been slow, even as Wall Street banks like Citigroup Inc. and JPMorgan Chase & Co. now recommend buying the lira and HSBC Holdings Plc called Turkey “one of our favorite markets.”

A steadier currency could offer a possible respite from inflation by helping hold back the cost of imported goods. Having depreciated by nearly 4% against dollar in March during the run-up to elections, the lira was mostly flat last month. It’s down almost 9% in the year to date.

“We think encouraging policy signals will contain downward pressure on the lira,” Maya Senussi of Oxford Economics said in a report. “The risk of faster nominal depreciation is still substantial given the inflation outlook and upside risks from global rates, oil prices, and geopolitics.”

What Bloomberg Economics Says...

“Turkey’s April inflation print will likely show its surging price problem has worsened — even after the central bank concluded its 10-month long tightening cycle in March. Risks to the inflation outlook are tilted upward, with hazards including a currency slide or a further escalation in the Middle East war.”

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

For now, inflation shows few signs of abating. Retail price growth in Istanbul, Turkey’s largest city and commercial hub, surged 4.9% in April on a monthly basis, an increase of almost a full percentage point from March.

Karahan’s presentation in Washington in mid-April showed that seasonally adjusted monthly core inflation increases remained above central bank projections during all of this year’s first three months.

Worsening sentiment among households is adding another complication. The results of the first survey of inflation expectations by Koc University researchers and pollster Konda found Turks see consumer inflation at 96% by the end of the year, more than double the projection in the central bank’s April survey of market participants.

A turnaround in inflation may start to materialize after May, thanks in part to favorable statistical effects. After peaking at 73% this month, Bloomberg Economics expects annual inflation to fall by 10 percentage points each in July and August.

The central bank currently sees year-end inflation at 36% and will update its forecasts on May 9.

Monetary policy will remain tight “until a significant and sustained decline in the underlying trend of monthly inflation,” the central bank has said, without ruling out an even more restrictive stance if it identifies “a significant and persistent deterioration” for price growth.

--With assistance from Joel Rinneby and Beril Akman.

(Updates with lira’s 2024 performance in sixth paragraph.)

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