Rising Turkish inflation puts rate hike option back in focus

ISTANBUL: Turkish inflation rose above 15% in February to levels it last hit in mid-2019, according to data on Wednesday that could prompt the central bank to raise the highest interest rates of any major economy even higher.

Consumer prices rose 15.61% year-on-year and 0.91% from January, the Turkish Statistical Institute said. Both figures surpassed forecasts of 0.7% and 15.39%, respectively, in a Reuters poll.

Stuck in double digits for most of the last four years, inflation has edged higher the last four months despite the central bank, under new governor Naci Agbal, hiking its key rate to 17% from 10.25% in November and December.

That has given Turkey the tightest monetary policy of any major developed or emerging market economy, slowing an economic rebound from the pandemic.

Rate cuts are expected later in the year.

But some analysts now predict a hike this month to address both inflation and a drop in Turkey’s lira which tends to raise import prices, notably for energy, of which the country is a significant importer.

The currency tumbled more than 1% on Wednesday and has lost nearly 7% in two weeks, halting a rally since November.

James Lord, well-known strategist at Morgan Stanley, anticipates a 100-point hike in March. “That is not something the market is really expecting and if they deliver that the lira would probably stabilise,” he said.

Yet last month’s price rise remained within the bank’s forecast range of about 14% to 16.5%.

The bank targets 5% inflation and, in an investor presentation Wednesday, it repeated a promise to raise rates again if needed to ensure it drops to a 9.4% year-end forecast.

But President Tayyip Erdogan is a self-described “enemy” of interest rates and regularly calls for cuts, raising the prospect Agbal may not be able to see through his policy plan. Erdogan abruptly fired the last two bank governors after short stints.

The monthly price rise was driven by the health and food groups, which rose 3% and 2.57% respectively. Annual transportation prices jumped more than 22%, reflecting costly energy imports and lira volatility.

The producer price index rose 1.22% month-on-month in February for an annual rise of 27.09%, the data showed.

The central bank has said newly adjusted CPI weightings should raise inflation by 0.5 points by April. Economists expect inflation to then begin falling, with a Reuters poll year-end estimate of 10.9%.