Inflation in Turkey surged to a 15-month high in February, surpassing expectations and fuelling fears of further rate hikes.
ADVERTISEMENTThe Turkish Statistical Institute announced on Monday that the country’s annual inflation rate rose to 67.07% in February, overshooting forecasts.
Analysts polled by Reuters had predicted that annual inflation would climb to 65.7% in February, before falling to 42.7% by the end of 2024.
From January to February, the monthly rate of change was 4.53%, less than last month’s jump of 6.7%, but well above the Reuters poll forecast of 3.7%.
The shock result was primarily driven by price increases in the hotel, cafe, and restaurant sectors, along with inflation in the education sector.
Experts are also suggesting that an increase in the minimum wage, introduced on 1 January, played a hand in February’s reading.
An end to steady rates?
Less than two weeks ago, Turkey’s central bank decided to keep its key interest rate steady at 45% after an eight-month tightening cycle, a decision that is now being called into question.
Some are now predicting further rate hikes, especially given the bank’s hawkish position last month.
When shifting its stance on borrowing costs, the bank said in a statement: “Monetary policy stance will be tightened in case a significant and persistent deterioration in inflation outlook is anticipated.”
Yet whilst some are pessimistic about February’s inflation figures, some argue that interest rate increases just need time to work through the economy.
Speaking to BloombergHT just before the recent data was released, Turkey’s Finance Minister Mehmet Şimşek explained that inflation would be sticky in the coming months, but predicted a decrease over the year.
The fall of the lira
High inflation is also linked to the weakness of the Turkish lira, with the currency trading at 31.53 against the dollar on Monday afternoon.
The Turkish currency has lost 40% of its value against the dollar in the past year, and 82.6% in the last five years.
This is down to a number of factors, notably the effects of the COVID-19 pandemic, political unrest, and Turkey’s unorthodox monetary policy.
Although he has since altered his stance, President Recep Tayyip Erdoğan had long pressured Turkey's central bank into cutting borrowing costs, controversially arguing that low rates help to fight inflation.
"The policy set we are implementing now is making the lira attractive," said Şimşek in an interview with Bloomberg HT television on Monday.
"We want the lira to be neither overvalued nor undervalued."
A currency is overvalued if imported goods are relatively cheaper and exports are expensive, meaning a swing one way or the other can hurt foreign trade or local firms.
