Turkey inflation hits 15-month high

Quick look

• Turkey's annual inflation hit a 15-month high of 67.1% in February.
• Monthly inflation exceeded forecasts, standing at 4.5%, indicating sustained pressure on prices.
• Despite inflationary pressures, the central bank is keeping interest rates stable at 45%, opting for a cautious approach ahead of local elections.

Turkey's economic outlook is undergoing significant changes, with annual inflation reaching its highest level in 15 months. In February, inflation increased significantly to 67.1%, compared to 64.9% in January. This increase, driven in part by a significant increase in the minimum wage earlier in the year, marks the fourth consecutive month of price increases. Monthly inflation, a key focus for the central bank, also beat expectations, reaching 4.5% despite a decline from 6.7% in January. This persistent inflationary pressure highlights the challenges facing the country's monetary authorities.

Position of the Central Bank regarding the increase in costs

The central bank's reaction to rising inflation has been cautious. After raising interest rates by a total of 3,650 basis points in eight steps, the bank paused, leaving rates unchanged at 45%. This decision reflects a cautious stance, particularly with local elections on the horizon. The expectation that inflation could peak above 70% in May further complicates the situation. Authorities are employing a strategy that combines patience and prudence, even as real interest rates fall into negative territory.

Economic factors and political challenges

Several factors are contributing to the rise in inflation. The new central bank governor, Fatih Karahan, points to the increase in the minimum wage as a significant inflation risk. Additionally, sharp increases in prices for unprocessed foods and services, including rent and education costs, have caused the inflation rate to exceed expectations. These sectors show strong domestic demand that has yet to adapt to tighter monetary conditions. Now that the central bank plans to maintain the monetary policy rate until the third quarter, attention is focused on alternative adjustment tools. This approach becomes more complex when easing fiscal policies before critical local elections, adding another layer of difficulty in controlling inflation.

Türkiye's inflationary trajectory presents a complicated challenge for authorities. With the central bank taking a wait-and-see attitude amid political and economic pressures, navigating the path forward requires careful consideration. The role of fiscal policies, especially in an election year, and the effectiveness of alternative monetary tools will be key in shaping Turkey's inflation outlook in the coming months.