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A rally in global energy prices and domestic credit growth are fueling ever faster inflation in Turkey, already the highest rate among Group of Twenty economies.
Consumer prices probably rose an annual 67.8% through April, up from 61.1% a month earlier, according to the median estimate in a Bloomberg survey of economists.
Despite the pace, the central bank has previously signaled it will not tighten monetary conditions, leaving it increasingly out of step with the global economy.
“Inflation won't trigger a rate hike by the central bank,” Enver Erkan, chief economist at Tera Yatirim, wrote in an emailed note last week. “The government is supportive of a low-rate policy to boost growth and doesn't believe higher rates would slow inflation.”
The belief that higher interest rates fuel inflation is championed by Turkish President Recep Tayyip Erdogan, but it goes against textbook assumptions held by central bankers around the world.
Turkey Rewrites All Inflation Forecasts But Won't Budge on Rates
In its inflation report last week, the central bank blamed price increases on the Russian war-induced surge in energy and food costs. Governor Sahap Kavcioglu said Turkey didn't need to increase rates just because other central banks, including the U.S. Federal Reserve, are doing so. On Wednesday, the Fed delivered the biggest interest-rate increase since 2000 and signaled it would keep hiking at that pace over the next couple of meetings.
Fed Hikes Rates Half-Point as Powell Signals Similar Moves Ahead
Turkey's central bank has held interest rates for four consecutive months this year after a cycle of cuts in late 2021. The central bank's next scheduled interest rate meeting is on May 26. April inflation data are due for publication on Thursday.
The bank expects price increases to begin slowing down next month, but investors have questioned the monetary authority's track record on forecasts.
Turkey's elevated inflation, and resistance to raising rates, have pushed its borrowing costs deeper below zero when adjusted for prices. Turkish loan growth is now well above its 10-year average.
The inflationary impact from global energy prices has been severe, especially since the cuts late last year derailed the lira and made imports of everything from food to industrial goods more expensive.
Turkish policymakers have mainly heeded Erdogan's demands for lower rates since he expanded his powers with 2018 elections. Erdogan sacked three central bank governors for not toeing his line, and installed Kavcioglu, a former lawmaker of the ruling party, in March last year.
With Kavcioglu at the helm, the central bank's key one-week repo rate of 14% corresponds to the world's lowest -- at about negative 47% -- when adjusted for price increases.
The so-called real rate is expected to go deeper below zero and will keep fanning inflationary pressures, said Erkan, the economist.
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