Distressed lira pushes Turkish inflation to 19-year high

Annual consumer inflation rate rose to 36% in December, the highest since September 2002

Tourists at a spice bazaar at Eminonu district in Istanbul. AFP

Turkish inflation surged to a 19-year high in December, propelled by a slump in the lira and President Recep Tayyip Erdogan’s push for cheaper borrowing.

The annual consumer inflation rate rose to 36.08 per cent last month, the highest since September 2002 and up sharply from 21.31 per cent in November. The figure far exceeded the 27.36 per cent median estimate in a Bloomberg survey of 19 analysts.

Turkey’s central bank has slashed its benchmark interest rate by 500 basis points since September in a series of moves encouraged by Mr Erdogan, who has attacked elevated borrowing costs as a challenge for businesses and a brake on economic growth. The cuts have sent the lira into a tailspin that is fuelling consumer price increases.

The lira recovered some of its losses in December after Mr Erdogan introduced a mechanism that promises to compensate holders of the lira when the currency weakens to a certain level. However, the currency is about 31 per cent weaker than it was on September 23, when the central bank started cutting interest rates.

The acceleration in inflation takes Turkey’s benchmark interest rate adjusted for inflation to negative 22.08 per cent, the lowest real yield among emerging markets.

The decision to slash five percentage points off the central bank’s benchmark rate led to a 44 per cent slide in the lira last year, making it the worst performer among all major currencies tracked by Bloomberg. The currency also weakened after the December inflation report and was trading 2.3 per cent lower as of 10.30am local time on Monday.

“We expect the headline inflation to accelerate until May-June,” said Ozlem Bayraktar Goksen, Istanbul-based chief economist at Tacirler Yatirim. “We don’t see a change in policy rate in the first quarter in line with the central bank’s guidance.”

Annual price gains in food, which makes up about a quarter of the consumer basket, reached 43.8 per cent in December, well above the central bank's official estimate of 23.4 per cent.

The rate of inflation in energy rose to 42.93 per cent in December from 32.14 per cent the previous month.

A core inflation index showed prices excluding volatile items such as food and energy rose an annual 31.88 per cent compared with 17.62 per cent in November, a sign of strong inflationary pressures underlying the headline figure.

Although rising inflation has hurt Mr Erdogan’s popularity ahead of the 2023 election, he insists that he will push on with a policy shift he said aims to boost manufacturing and exports and reduce the influence of international markets on Turkish monetary policy.

The central bank expects inflation to follow a volatile course although it expects its looser monetary stance will lead to inflation resuming its downward trend “once temporary effects disappear”.

The bank has repeatedly said that transient factors rather than lower interest rates are behind the latest surge in prices. Turkey’s monthly inflation will begin to slow in January as the lira stabilises and the government cracks down on unjustified price increases, Finance Minister Nureddin Nebati said last week.

The central bank will hold its next rate-setting meeting on January 20 and publish its first inflation report of the year on January 27.