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Turkey inflation hits new 24-year high of 83% after rate cuts

REUTERS/Dilara Senkaya
A tourist waits in front of a currency exchange office in Istanbul, Turkey, on September 26, 2022.

Turkish annual inflation climbed to a new 24-year high of 83.45 percent in September, data showed on Monday, still lower than forecast, after the central bank surprised markets by cutting rates twice in the last two months.

Despite soaring prices, the central bank was expected to cut its policy rate again this month, after President Tayyip Erdogan called for single-digit interest rates by the end of the year.

Inflation has surged since November last year, as the lira slumped following cuts to the policy rate by the central bank, in an unorthodox easing cycle long sought by Erdogan.

Month-on-month, consumer prices rose 3.08 percent, the Turkish Statistical Institute said, less than a Reuters poll forecast of 3.8 percent. Annually, consumer price inflation was forecast to be 84.63 percent.

It was the highest annual figure since July 1998, when it stood at 85.3 percent and Turkey was battling to end a decade of chronically high inflation.

September inflation was driven by transport prices, which surged nearly 118 percent year-on-year, while food and non-alcoholic drinks prices jumped 93.05 percent.

Despite the relentless rise in inflation, Erdogan said last week he had advised the central bank to lower its policy rate at its upcoming meetings, a day after saying he expects interest rates to come down to single digits by year-end.

JP Morgan said inflation was likely to remain in the “abnormally high range until policies get orthodox,” adding that it expects the easing cycle to “continue until it cannot.”

“Monetary policy decisions have become disconnected from macro fundamentals and have become almost irrelevant for short-term inflation dynamics,” it said in a note.

Recessionary Forces

Global recessionary forces, their impact on commodity prices and the pace of the lira’s depreciation will be the main determinants of inflation, JP Morgan added.

After the data, the lira traded at 18.5620 against the dollar, weakening from a close of 18.5060 on Friday. It stood at 18.5660 at 1302 GMT.

The currency has been less reactive to economic data and Erdogan’s comments than in the past, largely due to the central bank adopting a more dominant role in the forex market since December.

Goldman Sachs said it now expects the central bank to cut its policy rate by 100 basis points every month until the end of the year.

The bank cut its policy rate by 200 basis points to 12 percent in the last two months, going against a global tightening cycle despite the sustained rise in inflation, surging energy prices and the lagged effect of the lira’s decline.

Last year’s rate cuts had triggered a currency crisis that wiped 44 percent off the lira’s value against the dollar in 2021. It has weakened some 29 percent this year to fresh all-time lows.

Last week’s Reuters poll had shown that annual inflation was expected to decline to 72 percent by the end of 2022.

The government has said inflation will fall with its economic programme prioritising low rates to boost production and exports with the aim of achieving a current account surplus.

The domestic producer price index was up 4.78 percent month-on-month in September for an annual rise of 151.50 percent.