Turkey's inflation rate soars to 24.5% in September as lira slides

Prices are rising at the fastest pace since June 2003

The central bank raised borrowing costs last month to their highest level in nearly two decades. EPA

Turkey’s consumer inflation climbed to one of the highest levels since President Recep Tayyip Erdogan came to power 15 years ago, spurring calls for higher interest rates to rein in prices.

The inflation rate rose for a sixth month to 24.5 per cent in September from a year earlier, above all expectations in a Bloomberg survey where the median estimate was 21.1 per cent. The monthly rate was 6.3 per cent, driven by an across-the-board spike provoked by the lira’s meltdown. Treasury and Finance Minister Berat Albayrak blamed hoarders and speculators, and predicted inflation would stop quickening in October.

Wednesday’s inflation report puts monetary policy makers in a bind. The central bank raised borrowing costs last month to their highest level in nearly two decades, yet prices are gaining at their fastest pace since June 2003.

Given his distaste for higher interest rates and an apparent slowdown in the economy, the bank has little room to act against further price surges. But with the lira losing as much as 40 per cent of its value against the dollar since the beginning of the year, the worst may be yet to come.

“An inflation print so bad that it truly feels like old Turkey,” said Inan Demir, an economist at Nomura International in London. “But this is simply too bad to ignore. Note that annual headline inflation is now above the bank’s policy rate at 24 per cent, which calls for another rate hike.”

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The lira weakened as much as 1.6 percent after the data release and was trading 0.8 percent lower at 6.0330 to the dollar at 11:40 a.m. in Istanbul. The inflation rate is almost five times the central bank’s target of 5 per cent and almost double its 2018 forecast.

Speaking after the data release in a pre-arranged interview with NTV, Mr Albayrak attributed much of the increase to hoarding and speculative pricing by businesses taking advantage of volatility. Officials will soon be meeting representatives of various sectors of the economy for a new framework to curb prices that the government will likely announce next week, he said.

“The current trend will be broken in October,” Mr Albayrak said.

Nigel Rendell, a London-based senior analyst at Medley Global Advisors, said the inflation figure was “a shocker” but maintained some optimism that weak consumption might offset inflationary pressures at some point.

“Interest rates of 24 per cent provide some protection, and there is a sense that the weakness of domestic demand will be the dominating disinflationary force in a few months’ time once the foreign exchange pass-through has fed its way through the system,” Mr Rendell said.

What might worry policy makers is the pace at which consumer inflation is catching up with producers’ rising costs, said BlueBay Asset Management strategist Tim Ash. Producer prices rose in September by more 10 per cent from the previous month, bringing the annual increases to over 46 per cent.

Given the slowdown in economic activity, there is little justification to raise rates at this point, but the government should end its spat with the US over a detained US pastor to relieve market turmoil and pressure on the central bank, Mr Ash said.