Inflation has hit 25% in Turkey but now the central bank must hold its ground

Yasin Akgul |  AFP | Getty Images

A money changer counts Turkish lira banknotes at a currency exchange office in Istanbul, on August 8, 2018. 

Consumer price growth has hit a whopping 25 percent in Turkey, but the real challenge lies in the central bank not bowing to pressure to lower interest rates “prematurely” as the inflation rate starts to fall, analysts have said.

Turkey saw a stronger-than-expected rise in inflation in October, with prices rising 25.2 percent year-on-year, marking the highest inflation rate in 15 years. Core inflation, which strips out volatile factors like energy and food prices, was similarly high. The headline rate is now far above the central bank’s target of 5 percent.

Inflation has largely been driven by the country’s “currency crisis” with the lira falling 30 percent against the dollar year-to-date. It had suffered a deeper rout in August when it was down 45 percent against the greenback, but has since recovered some ground. Currency depreciation has been a key factor behind Turkey’s inflationary pressures but other issues, including concerns over the central bank’s independence and a diplomatic crisis with the U.S., fueled those losses.

Traditionally central banks have raised interest rates to tackle inflation but Turkey’s bank is under pressure, notably from President Recep Tayyip Erdogan, to lower interest rates in order to stimulate spending, lending and economic growth. It defied the president by tightening its monetary policy stance in September, however, raising its benchmark one-week repo rate (its main policy rate) to 24 percent, and maintaining that rate in October.

Jason Tuvey, a senior emerging markets economist at Capital Economics, said Monday that he believes Turkey’s inflation rate has hit, or is close to, a peak and hence the central bank would be unwilling to tighten (increase interest rates) any further.