Turkish inflation climbed more than expected in November as this year’s lira depreciation filtered through to prices, raising pressure on new central bank governor Naci Agbal to keep monetary policy tight.
Consumer prices increased an annual 14% last month, the fastest rise in over a year and higher than every forecast in a Bloomberg survey of 18 economists, whose median estimate was 12.7%. The producer price index jumped 23%, the most since June 2019.
Headline inflation only inched up in October, when the lira lost 7.5% against the dollar, the most in the world and its steepest monthly decline since a currency crisis in 2018. Economists say the currency’s slide over the past three months was reflected in November’s figures instead.
The lira has been battered this year by a campaign of stimulus including steep interest-rate cuts that continued until the summer, alongside a surge in fiscal spending and a government-sponsored credit push.
“High inflation is driving dollarisation and devaluation pressures,” said Timothy Ash, a strategist at BlueBay Asset Management. The Turkish central bank “has to break the cycle by keeping rates high enough to make it pay to hold lira.”
Retail prices in Turkish commercial capital Istanbul rose 1.94% in November from the previous month, according to the Istanbul Chamber of Commerce. The annual retail inflation rate accelerated to 14.1% from 12.4% in October.
The lira has lost nearly a quarter of its value since the beginning of the year – even after last month’s overhaul of Turkey’s top economic decision-making team spurred a 6.7% rally in the currency. The new central bank governor and finance minister have already begun lifting restrictions meant to prevent speculators from shorting the lira, abolished rules compelling lenders to extend credit and raised interest rates by the most in over two years to 15%, signaling a return to more orthodox economic policies.
But the lira is likely to see more turbulence in the short term as Turkey unwinds the interventionist policies put in place before.
The November inflation rate was higher than expected due to a rise in oil prices and currency effects, Treasury and Finance Minister Lutfi Elvan said in a Twitter post. “We will coordinate monetary and fiscal policy tools to establish price stability and to manage inflation expectations,” he wrote after the numbers were released.
With inflation in double digits for much of this year, the real interest rate was negative until October. After yesterday’s data, Turkey’s interest rate adjusted for inflation stands at almost 1%. “While the lira has rallied strongly over the past month and the economy looks set to suffer a fresh downturn, this raises the risk that the central bank is forced to implement further interest rate hikes,” Jason Tuvey, Senior Emerging Markets Economist at Capital Economics, said.
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