Turkish inflation hits 75% but minister says worst is over

Turkey’s official inflation rate hit 75.5 per cent last month amid increased spending by consumers undeterred by hefty interest rate increases, but the government said it believed price rises had peaked.

Data released on Monday by the Turkish Statistical Institute showed annual consumer price inflation up sharply in May from the 69.8 per cent recorded in April and at its highest level since November 2022.

The institute said inflation was highest in education, housing and restaurant prices. Economists had expected May inflation to be just shy of 75 per cent, according to polls by Bloomberg and Reuters.

“The worst is behind us!” finance minister Mehmet Şimşek said in a post on social media site X after the data was announced.

“We are entering the disinflation process. The permanent decline in inflation will begin in June,” Şimşek said, adding that the government would reduce spending to help rein in prices.

Turkish policymakers who have sought to tackle a long-running cost of living crisis expect increasing impact from cumulative interest rate hikes of 41.5 percentage points, to 50 per cent, over the past year.

The effort to tame inflation through higher interest rates was a dramatic shift by President Recep Tayyip Erdoğan, who had previously forced the central bank to keep rates low for years to stimulate the economy.

After entering his third decade in power last year, Erdoğan appointed Şimşek, a former investment banker who previously served as finance minister, back to the post to repair credibility with foreign investors.

Labour unions have warned that Turkey’s poor are paying the price of austerity measures, estimating that the hunger threshold for a family of four in May was about TL19,000 ($590) a month, more than the minimum wage of TL17,000. Economy officials have ruled out an interim wage hike this year. 

The central bank has kept its benchmark interest rate on hold at the last two meetings and is testing other measures to curb loan growth, saying after a rate meeting last month that higher borrowing costs would have a “lagged effect” on inflation. The bank expects annual consumer price inflation to slow to 38 per cent by the end of the year.

But higher interest rates have not deterred Turkish consumers from spending, rather than saving. GDP data released on Friday showed household consumption jumped 7.3 per cent in the first quarter, fuelling a 5.7 per cent expansion in Turkey’s economy.

Inflation appeared to have reached a “cyclical peak”, Bartosz Sawicki, a market analyst at brokerage Conotoxia, wrote in a research note, but warned that strong consumption means policymakers were unlikely to lower interest rates this year.

“Resilient domestic demand and loose fiscal policy suggest that inflationary risks prevail and will continue to require a tight policy stance until the last quarter of 2024,” Sawicki wrote.

Turkey has one of the highest inflation rates in the world, outpaced by Zimbabwe, Argentina, Sudan and Venezuela, IMF data shows.