Turkey battles surging inflation: Hopes and hurdles ahead

Inflation in Turkey for April increased to 69.8 per cent on a year-on-year basis. Although this figure is marginally lower than analysts' predictions (who expected around 70.3 per cent) and represents the slowest pace of price increases since November 2022, when the CPI index hit approximately 85 per cent, economists are cautioning against expecting rapid interest rate reductions.

Turkey continues to battle one of its most challenging economic issues. Inflation in April climbed to 69.8 per cent year-on-year, marking a slightly better outcome than the anticipated 70.3 per cent. Liam Peach, an economist at Capital Economics, as reported by Reuters, forecasts a decrease in inflation in the latter half of this year, but the speed at which disinflation will occur remains uncertain.

Peach anticipates that the Central Bank of Turkey (TCMB) will delay any cuts to interest rates until 2025. The bank's primary interest rate was increased to 50 per cent in March, with the associated announcement stating, “Restrictive monetary policy will continue until a significant and sustained reduction in core monthly inflation is achieved.”

For many years, Turkey has been dealing with persistent inflation. Price increases have consistently been in the double digits since mid-2018. A rigorous sequence of interest rate hikes implemented by the central bank resulted in a deceleration of CPI growth at the turn of 2022 and 2023. However, the current rate of 69.8 per cent remains significantly above the central bank's official annual target of 5 per cent inflation.

Economists highlight that keeping interest rates at such elevated levels hampers Turkey's economic growth. It is predicted that the nation's GDP will grow by merely about 2.8 per cent this year, a slowdown from last year’s 5.6 per cent expansion. This slowdown has increased political pressure on the central bank to ease monetary policy. Turkish President Recep Tayyip Erdogan has long advocated for lower interest rates as a strategy to boost the economy.

Nonetheless, it appears that the Central Bank of Turkey will resist pressure from politicians and will continue to focus on fighting inflation. Market consensus suggests the TCMB's main rate will stay at 50 per cent until at least the end of 2024. Given the country's extensive economic challenges, the journey towards disinflation is expected to be gradual, as reported by the Reuters agency.