Turkey’s inflation dips below 85% after a 17-month surge

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Locals and foreign tourists shop at the Grand Bazaar in Istanbul, Turkey. Reuters

Turkey’s official inflation rate eased to 84.4 per cent in November, its first fall in 17 months, in a sign that the economic upheaval caused by President Tayyip Erdogan’s unorthodox policies could moderate in time for elections in six months.

The annual rate was just below forecast at 84.39 per cent, down from a 24-year high of 85.51 per cent in October. Turkey’s cost-of-living crisis was set off last year when the central bank began stoking prices by cutting interest rates at Erdogan’s behest.

Month-on-month, consumer price inflation rose 2.88 per cent, the Turkish Statistical Institute said, compared with a Reuters poll forecast of 3 per cent. The annual forecast was 84.65 per cent.

Last month, the central bank wrapped up the easing cycle that had brought the policy rate to 9 per cent from 19 per cent last year. It was carried out despite soaring prices and a global trend in the other direction toward tightening.

The government has emphasized low rates to boost production and exports with the aim of achieving a current account surplus, which it says will lead to a lasting fall in inflation.

Economists forecast inflation will cool toward the end of the year, largely due to favourable base effects from late 2021, when the rate cuts sparked a currency crisis that sent prices soaring.

Facing tight elections in May or June, Erdogan’s government has employed a policy of tightly controlling the foreign exchange rate with indirect foreign exchange sales to the market, and a heavy hand in directing credit in the economy.

“These measures do not appear to be sustainable, but it seems that the economy management will try to maintain this strategy until the elections,” said Burumcekci Research & Consultancy’s Haluk Burumcekci.

The Reuters poll sees inflation ending 2022 at 69 per cent. Burumcekci sees it dipping to 43 per cent a year later.

The lira traded flat at 18.6375 after the data and has been largely stable since the summer. It shed 44 per cent against the dollar in 2021, most of it during the crisis, and fell another 29 per cent this year, touching historic lows.

The biggest monthly rise in November prices was in the food and non-alcoholic drinks sector, which was up 5.75 per cent, while alcoholic drinks prices climbed 3.19 per cent.

The central bank cut its policy rate by 150 basis points in November, bringing the cumulative easing in four months to 500 basis points. The easing ran counter to orthodox economic policy in which rates are raised to cool prices.

The domestic producer price index was up 0.74 per cent month-on-month in November for an annual rise of 136.02% .

Meanwhile Turkey’s economy expanded 3.9 per cent in the third quarter from a year ago, according to official data released on Wednesday, though growth slowed from the previous quarter as a global slowdown put a drag on exports, but the tourism sector remained strong.

Gross domestic product (GDP) contracted 0.1 per cent from the previous quarter on a seasonally and calendar-adjusted basis, data from the Turkish Statistical Institute showed, marking the first contraction since the height of the COVID-19 pandemic in the second quarter of 2020.

Economists expect full-year growth of 5 per cent, in line with forecasts, according to the latest Reuters poll, after a strong first half of the year. Economists expect growth to slow further in Q4.

“It seems it is still possible to attain the 5 per cent growth target if there is no quarterly contraction of more than 0.5 per cent in Q4,” Haluk Burumcekci, of Burumcekci Consulting, said. The outlook for 2023 remains uncertain. A national election should take place no later than June, and an opposition victory could see a sharp reversal of President Tayyip Erdogan’s economic policies.

Private consumption remained strong in the third quarter.

Analysts predicted growth would slow in the second half due to a downward trend in foreign demand, notably among Turkey’s largest trade partners.

To counter the slowdown, Turkey’s central bank embarked on an easing cycle between August and November, slashing its policy rate by 500 basis points to 9 per cent.

Erdogan’s economic programme over the last 14 months prioritised growth and exports.

Central bank interest rate cuts that were sought by Erdogan last year led to a 44 per cent depreciation in the lira and it has lost another 29 per cent against the dollar this year, sending inflation to a 24-year high of more than 85 per cent in October.

Last year, Turkey’s economy bounced back strongly from the COVID-19 pandemic and grew 11.4 per cent, its highest rate in a decade. Annual growth in the second quarter of 2022 was revised to 7.7 per cent from 7.6 per cent, data showed on Wednesday.

Meanwhile Turkey’s central bank said it had cut its main policy rate for the fourth consecutive month despite high inflation. On the wishes of President Recep Tayyip Erdogan, the bank said it had lowered its benchmark rate from 10.5 per cent to nine per cent.

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