Inflation in Türkiye rises to 68.5% despite the continued increase in interest rates

Turkey's annual inflation rate rose to 68.5% for March, up from February's reading of 67.1%, according to a Turkish Statistical Institute report released on Wednesday.

The monthly rise in consumer prices was 3.16%, led by education, communications, hotels, restaurants and cafes, which saw monthly increases of 13%, 5.6% and 3.9%, respectively.

On an annual basis, education again saw the highest cost inflation at 104% year-on-year, followed by hotels, restaurants and cafes at 95% and health at 80%.

Turkey has launched concerted efforts to address rising inflation by raising interest rates, most recently raising the country's key interest rate from 45% to 50% in late March.

Much of the inflation in recent months stems from a significant increase in the Turkish government's minimum wage for 2024. This year's minimum wage rose to 17,002 Turkish liras (about $530) per month in January, a 100% rise from the same level. period a year ago.

Economists expect that further increases in interest rates from the central bank will be necessary.

While the March inflation statistic represents the “smallest monthly increase in three months” and suggests that the impact of January's large minimum wage increase may now have largely passed, it is still far from consistent with single-digit inflation. “Policymakers are trying to combat it.” Nicholas Farr, European emerging economist at London-based Capital Economics, wrote in an analysis note on Wednesday.

“The latest inflation numbers do little to change our view that further monetary tightening lies ahead, and that more coordinated efforts to tighten fiscal policy are needed,” he said.

The Central Bank of Turkey implemented eight consecutive interest rate increases from June 2023 to January 2024, for a cumulative total of 3,650 basis points. He paused in February, signaling that the tightening cycle had ended, before raising interest rates again in March, citing a “deteriorating inflation outlook” and saying that “a tight monetary stance will be maintained until there is a significant and sustained decline in the underlying trend in monthly inflation.” . Observed.”

Analysts point out that with the end of local elections in Turkey, which took place on March 31, it will likely be easier to proceed with tightening monetary policy. The vote on mayors across the country, which took place on Sunday, saw Turkey's opposition party deal a historic blow to Turkish President Recep Tayyip Erdogan's ruling Justice and Development Party, winning the country's five largest cities and several rural areas as well.

Political observers said economic pain and sharp increases in the cost of living for ordinary Turks over the past few years played a major role in the results.

By exercising tight control over the central bank, Erdogan over the past few years has refused to raise interest rates, calling them the “mother of all evil” and insisting, contrary to economic doctrine, that lowering interest rates is the way to calm inflation. This came despite a decline in foreign currency reserves and rapid weakness turkish lira, Which lost about 82% of its value against the dollar during the past five years.

A shift in policy occurred only after the appointment of a new finance and central bank team in May 2023, signaling greater independence at the bank from the executive branch of the Turkish government. But the political loss of Erdogan's party in the local elections that took place last March may make his future moves unpredictable, some analysts say.

“The vote result fuels political uncertainty and raises doubts about whether President Recep Tayyip Erdogan will stick to unpopular orthodox policies,” Bartosz Sawicki, a market analyst at fintech firm Konotoxia, wrote in a note. But he added: “With no elections until 2028, another comprehensive reform that would lead to a return to ultra-loose monetary policy seems unlikely.”