Turkey’s consumer price inflation accelerated to an annual 17.5 percent in June, the highest level in more than two years, posing a challenge to the central bank, which is facing political pressure to cut interest rates.
The inflation rate rose from 16.6 percent in May, the Turkish Statistical Institute said on Monday. The annual price increase exceeded estimates of between 16.8 percent and 17 percent in polls of economists conducted by Reuters and Bloomberg.
Last month, President Recep Tayyip Erdoğan, who has sacked three central bank governors in two years, called on monetary policymakers to cut the benchmark interest rate of 19 percent in July or August to help lower costs for businesses. Erdoğan says higher interest rates are inflationary, a theory that contradicts conventional economic wisdom.
Central bank governor Şahap Kavcıoğlu, hired by Erdoğan in March, has refrained from pledging clearly to hike interest rates to combat inflation. Instead, he says the central bank will keep rates above current and expected inflation.
“Horrible Turkish inflation prints – pretty much across the board. Kavcıoğlu will need to get off the fence and signal they can actually hike rates,” said Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London.
“It very much looks like the central bank promise to keep real rates positive will be tested with the headline rate very likely to push through the current 19 percent base rate,” he said.
Prices for transportation climbed by an annual 26.3 percent, furnishings and household equipment by 25.7 percent and food and non-alcoholic beverages by 20 percent, the institute said.
Producer price inflation surged to an annual 42.9 percent last month, the highest level since a currency crisis in 2018, from 38.3 percent in May.
Inflation in Turkey is accelerating partly due to lira weakness. The currency has sunk to successive record lows against the dollar over the past year after the central bank kept interest rates at below inflation for much of 2020 to help the government engineer a borrowing boom. The bank was forced to hike rates in September.
The lira was trading down 0.3 percent at 8.7 per dollar after the inflation data was released, close to a record low beyond 8.8 per dollar set at the start of June. Losses for the lira make imports more expensive, pressuring headline inflation.
Kavcıoğlu told investors on Friday that inflation may exceed expectations in the summer, but the current path does not indicate a need to hike interest rates, Reuters reported, citing unidentified sources at the meeting. He said that the central bank’s monetary committee policy would take the necessary decision in case of a surprise development, Reuters said.
The central bank next meets to decide on interest rates on July 14.
(This story was updated with central bank comments in the 11th paragraph.)