Following this month’s local elections, Turkey is anticipated to implement further policy measures in an attempt to lower persistently high inflation rates, which have been a source of hardship for Turkish citizens amidst ongoing economic challenges. Data and some economists suggest that despite the central bank’s recent decision to significantly raise interest rates – from 8.5% to 45% since last June – doubts remain among households and investors regarding whether this move alone is enough to effectively curb inflation, which reached 67% last month.
Finance Minister Mehmet Simsek and other officials have advised patience, indicating that the more orthodox policies adopted last year will eventually lead to price relief later in 2024. Simsek stated recently that major tax adjustments are not in the plans, while the central bank expressed readiness to elevate rates further if inflation exceeds projected levels in the coming months.
Nevertheless, the unexpected surge in inflation data for February, combined with sustained domestic demand, has heightened expectations for additional fiscal and monetary measures, although these are not expected to materialize until after the local elections on March 31, during which President Tayyip Erdogan is vigorously campaigning for his ruling AK Party.
According to Selva Demiralp, a professor at Istanbul’s Koc University and former Federal Reserve economist, “Monetary and fiscal policies are likely to tighten once the local election cycle concludes, following a brief pause. By mid-year, the full impact of these policies will be felt, and inflation is projected to rise until then, as adjustments to the minimum wage and other fiscal buffers dissipate.”
One of the measures aimed at mitigating the challenges posed by high inflation and borrowing costs is the 49% increase in the minimum wage implemented by Ankara this year. Demiralp and other economists argue that in order to achieve the central bank’s year-end target of lowering inflation to 36%, such fiscal interventions need to cease. JPMorgan anticipates a 500 basis-point rate hike in April to address the economic situation.
Consumers, confronted with an 8.25% surge in food and non-alcoholic beverage prices between January and February alone, express little optimism for relief in the near future. Gulsah, a 34-year-old mathematics teacher in Istanbul, shared her concerns, stating, “My husband and I are not optimistic about a rapid decrease in inflation. We try to save in foreign currencies and gold as a precaution, as we still lack trust that the lira will remain stable post-elections.” Worried about inflation, Gulsah mentioned purchasing a pressure cooker in November, despite not necessarily needing it, out of fear that its price would significantly escalate this year.
In a survey conducted by Koc University and Konda research firm involving over 2,500 respondents last month, 92% of households deemed it a favorable time to purchase appliances, electronics, and durable goods, reflecting a prevailing sense of skepticism regarding a reduction in inflation after enduring a prolonged period of rising living costs, exacerbated by Erdogan’s resistance to high interest rates and the frequent removal of central bank governors.
The annual growth rate of credit card spending soared to over 153%, while total loan growth reached 52% in the 12 months leading up to January, based on data from the banking watchdog. Bankers have advised the government to implement measures to curtail credit card expenditures in order to temper domestic demand.
Following his re-election in May of the previous year, Erdogan revamped his cabinet and central bank leadership to address concerns regarding depleted foreign reserves and escalating inflation expectations. Foreign investors began showing interest in Turkish bonds towards the end of last year, seeking opportunities amidst the rate hikes. However, the recent decline in market sentiment has put Erdogan’s commitment to tackling inflation to the test as his AK Party aims to regain control of Istanbul and other major cities from the opposition in the upcoming elections.
With the lira depreciating to new lows exceeding 31.8 against the dollar, 10-year bond yields reverting to November levels, and Turkey’s credit default swaps climbing to 330 basis points, the highest in a month, concerns about economic stability persist. Gizem Oztok Altinsac, chief economist for TUSIAD, Turkey’s largest business group, anticipates a reduction in annual inflation post-May due to base effects, although she projects a less substantial decline compared to the central bank’s forecasts, citing robust domestic demand as a contributing factor. Altinsac emphasized the importance of maintaining a tight fiscal policy alongside monetary measures to effectively combat inflation.
Hakan Kara, former chief economist at the central bank and professor at Bilkent University, highlighted the significance of timing in implementing necessary steps, stating, “An invisible hand ensures a tightness level just below optimum whenever the central bank is about to reach optimum policy tightness.” A Reuters poll predicts annual inflation decreasing to 42.7% by the end of the year, exceeding the central bank’s forecast. Simsek indicated in an interview this week that although inflation is expected to remain elevated in the near term due to base effects and delayed effects of rate hikes, a decline is anticipated over the next 12 months.
(Additional reporting by Nevzat Devranoglu, Ezgi Erkoyun; Writing by Ebru Tuncay; Editing by Daren Butler and Hugh Lawson)
