Turkish inflation rises by 36% while the lira crisis flares up

Women shop at a local market in the Fatih district of Istanbul, Turkey January 13, 2021. REUTERS / Murad Sezer

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  • Annual inflation hits Erdogan the hardest
  • Food and beverage prices rose almost 44% year-on-year
  • Real interest rates deeply negative after interest rate cut to 14%
  • The lira weakened 4% after the worst year in two decades

ISTANBUL, January 3 (Reuters) – Turkey’s annual inflation rose to a 19-year high, data showed on Monday, revealing the depth of a currency crisis developed by policies backed by the country’s president.

Consumer prices rose by 36.08%, exceeding a median forecast of 30.6%, with basic commodities such as transport and food and beverages – which took increasing share of Turkish households’ income in 2021 – rising even faster. Read more

In December alone, the CPI took a rare step in double-digit figures of 13.58%, data from the Turkish Statistical Institute showed.

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Turkey’s lira fell 44% of its value last year as the central bank lowered interest rates following a desire by President Tayyip Erdogan to prioritize credit and exports over currency stability. On Monday, it fell another 4% to 13.7 against the dollar. Read more

An economist predicted that inflation could reach as high as 50% by spring, unless the direction of monetary policy was immediately reversed.

“Prices should be raised immediately and aggressively because it is urgent,” said Ozlem Derici Sengul, founding partner of Spinn Consulting in Istanbul.

However, it was unlikely the central bank would act, she added, and annual inflation “is likely to reach 40-50% in March” when administered price increases would have been added to the mix, including a 50% minimum wage increase. Read more

Last year was the worst for the lira in almost two decades, while the annual CPI was the highest since the reading of 37.0% in September 2002, two months before Erdogan’s AK Party first took office. Read more

ALARM CLOCKS FOR INVESTORS, CONSUMER

Erdogan, a self-proclaimed enemy of interest rates, underwent central bank management last year. The bank has lowered its key interest rate to 14% from 19% since September, leaving Turkey with deeply negative real interest rates that have frightened savers and investors.

The subsequent accelerating rise in prices and the fall in the lira have also increased household and corporate budgets, worsened travel plans and left many Turks struggling to cut costs. Many stood in line last month for subsidized bread in Istanbul, where the municipality says the cost of living has risen by 50% in one year.

The central bank has argued that temporary factors had driven prices and predicted an unstable inflation trend, which – after being around 20% in recent months and mostly double-digit over the past five years – said it would end the year in October at. 18.4%. Read more

Sengul suggested that with Monday’s data, the argument had run its course.

“This reflects a vicious circle of demand-pull inflation, which is very dangerous because the central bank had indicated that price pressure was from cost-push (supply constraints) and that it could do nothing about it,” she said.

Reflecting soaring import prices, the December producer price index rose 19.08% month-on-month and 79.89% year-on-year. Annual transportation prices rose 53.66%, while the food and beverage basket jumped 43.8%, the CPI data showed.

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The economic turmoil has also hit Erdogan’s polls ahead of a tough election scheduled for mid-2023.

The lira reached a record low of 18.4 against the dollar in December, before rising sharply two weeks ago following state-sponsored market interventions, and after Erdogan announced a scheme to protect lira deposits from currency volatility.

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Reporting by Ezgi Erkoyun, Oben Mumcuoglu and Halilcan Soran; Edited by Jonathan Spicer and John Stonestreet

Our standards: Thomson Reuters Trust Principles.

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