Turkish Inflation Climbs to Highest Since 2018 on Lira Woes

(Bloomberg) -- Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

Turkish inflation accelerated for a sixth month in November to the highest level in three years, driven by a slump in the lira that continues to cloud consumer price outlook.

Annual inflation climbed to 21.31% through last month, up from 19.89% in October. That was faster than the 20.7% median estimate in a Bloomberg survey of 20 analysts. Monthly inflation was 3.51%, compared with the median estimate of 3% in a separate survey.

The lira fell as much as 1.4% after the release, nearing a record low of 13.9519 per U.S. dollar seen earlier this week. 

The “lira sell-off only began in mid-November and thus did not completely show through in” Friday's data, said Ehsan Khoman, head of emerging market research for Europe, Middle East and Africa at MUFG Bank in Dubai. “December's inflation print will be materially worse.”

Erdogan's Plan Backfires With ‘Desperation' in Turkish Lira

It's the first high-profile data point showing President Recep Tayyip Erdogan's plan to stabilize prices by lowering interest rates and letting the lira sink is backfiring. In the eyes of Erdogan, the lira's weakness is the cost of turning Turkey into an industrial powerhouse and freeing the country from a dependence on short-term foreign cash, which flows into the economy when rates are high.

But the currency's 29% drop during November -- the biggest monthly slump since Turkey adopted a floating exchange regime two decades ago -- is fueling prices and unease among voters, carrying the exact opposite impact of what Erdogan is trying to achieve.

The lira dropped as much as 1.3% to 13.8627 per dollar as of 12:48 p.m. in Istanbul, nearing a record low it has seen last week.

Key Insights

Energy prices rose an annual 32.14% in November from 25.76% the previous month although Turkey continues to subsidize natural gas and oil products to lessen the financial burden of increasing costs on end users. A global commodity boom has also contributed to producer prices, where inflation reached 54.6%, the highest reading since April 2002, according to data compiled by Bloomberg.

Annual price gains in food, which makes up roughly a quarter of the consumer basket, slowed to 27.11% from 27.41% but still remains well above the end-2021 official estimate of 23.4%.

The acceleration takes Turkey's benchmark interest rate adjusted for inflation to negative 6.3%, one of the lowest real yields among emerging markets. The direction of monetary policy and a lack of consistent forward guidance was cited by Fitch Ratings as it downgraded the outlook on Turkey's credit rating to negative from stable.

The central bank's “premature” easing cycle and the prospect of further monetary and fiscal stimulus ahead of the general elections scheduled for 2023 “create risks to macroeconomic and financial stability and could potentially re-ignite external financing pressures,” Fitch said on Thursday.

©2021 Bloomberg L.P.