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Has inflation in Turkey peaked at 75%?

Has inflation in Turkey peaked at 75%?
Has inflation in Turkey peaked at 75%?


Turkey's annual inflation rate reached 75.45% in May, its highest level since November 2022, and its monthly inflation rate was 3.37%, according to the Turkish Statistics Institute.

The largest price increases were in the education, housing and catering sectors.

Monthly inflation for the previous month was 69.80%. Despite this increase in both cases, the inflation rate is expected to slow after May.

The data revealed for May is not far off from the expectations of economists, many of whom expected inflation to peak at a similar pace.

A Reuters A poll found that annual inflation was expected to peak at 74.8% in May before falling to 42% by the end of the year.

Finance Minister Mehmet Simsek said on social media platform X that “the worst is over.” “This month we experienced the highest level of annual inflation. Thus, the transition period in the fight against inflation is over and we are entering the process of disinflation,” he added.

In a bid to control this price rise, President Recep Tayyip Erdogan set the interest rate at 50% in March, and the central bank said this monetary tightening would only stop when it sees a significant decline in trends. inflationary and that it would continue in the event of a deterioration of the outlook.

Erdogan had previously favored expansionary monetary policies with low interest rates to boost growth and economic activity. However, subsequent periods of soaring inflation forced him to suspend these policies and significantly raise interest rates to combat uncontrolled price rises.

Also read: Turkey's resurgent opposition defeats Erdogan in crucial local elections

This backsliding in his growth policy can perhaps be explained by the decline in support for his party caused by the rising cost of living and the inability to cope as a result. The decline in support is visible in the results of the March municipal elections and contractionary policies may therefore have been motivated by the hope of increasing support.

Erdogan's insistence on expansionary policies also led to a depreciation of the lira, which depreciated by more than five times against the US dollar compared to five years ago, and fell by more than 8 % This year.

However, since interest rates were raised in March, the currency has stabilized somewhat, which is part of the reason economists believe inflation has peaked and will continue to trend. on the decline.

This policy change also attracted foreign investment and central banks' foreign exchange reserves increased significantly.

However, although it is not very far off, the data released on June 3 shows inflation rates slightly higher than expected. “We are confident that inflation has now peaked but, with today's release containing some unpleasant surprises, the pace of disinflation in the second half looks a little more uncertain,” wrote Liam Peach of Capital Economics in an article. research note.

Indeed, the central bank increased its inflation forecast for the end of the year from 36% to 38%. It therefore appears that the expected disinflation will not be as simple as hoped.

Economists have differing opinions on when the central bank will cut interest rates.

While it's likely they'll have to do this at some point, it's unclear when exactly that will be the case.

If inflation targets are to be achieved by the end of the year, cutting interest rates will be difficult to achieve. However, delaying this action for too long could deepen the recession or irreversibly dampen economic stimulation and growth.




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