(Bloomberg) -- Turkish inflation soared to a fresh two-decade high in March, leaving the lira increasingly vulnerable by depriving the currency of a buffer against market selloffs.
Consumer prices rose an annual 61.1% last month, slightly below the median estimate in a Bloomberg survey and up from 54.4% in February. Annual producer inflation was in triple digits for a second month and the core index of prices, which excludes food and energy items, increased more than forecast to over 48% from a year earlier.
A three-month policy pause by the central bank means Turkey's interest rates are the world's lowest when adjusted for prices as the cost of everything from food to energy surges.
Turkey's ultra-loose monetary policy is out of sync with the rising hawkishness of many of the world's central banks at a time its economy is bracing for commodity shocks unleashed by Russia's invasion of Ukraine. With Turkey's real rates at minus 47%, the lira has already come under pressure, staging the second worst performance after Russian ruble in emerging markets against the dollar in March.
The central bank's present policies “became more questionable” in the current environment, with upside risks “still on the table” considering the pace of cost inflation, said Onur Ilgen, the head of the treasury at MUFG Bank Turkey in Istanbul.
How Sustainable?
“Given the dramatic change in the macro outlook and financial conditions, we think the long-term sustainability of this policy framework will be less likely with inflation running above 60% and likely to remain high above 50% at least until last quarter,” he said.
Rate hikes aren't on the agenda because of President Recep Tayyip Erdogan's goal of using a cheaper lira to turn Turkey into a manufacturing power. Declines in the currency, which has lost over 9% so far this year, are meanwhile feeding into inflation by making imports more expensive.
Speaking after the data release on Monday, Treasury & Finance Minister Nureddin Nebati predicted inflation will fall to “a reasonable level” by the end of the year, without being more specific.
“Inflation above 60% is a problem but Turkey has been released from the grip of interest rates,” Nebati said in the western industrial city of Bursa.
What Bloomberg Economics Says...
“The inflation data highlight the precarious state of the lira this year. An escalation of the war in Ukraine would hit the currency through rising import costs, while an end to the conflict could bring pressure from higher global interest rates. The inability of the central bank to raise interest rates magnifies the risks.”
-- Ziad Daoud, chief emerging markets economist. For full react, click here.
Governor Sahap Kavcioglu has said that support for the local currency would be a key objective this year but has shown little sign this would involve a tighter monetary policy stance. The lira was trading 0.1% weaker at 14.7080 per dollar as of 2:11 p.m. in Istanbul. It's down 9.5% so far this year.
The central bank is hoping to curb price growth by taking measures to encourage de-dollarization. Its next rate meeting is scheduled for April 14.
Below are the highlights of the March inflation report published by Turkstat on Monday:
- Producer prices rose 9.2% in the month, bringing annual inflation to 115%. Elevated levels of factory-gate inflation are continuing to put upward pressure on consumer prices
- Energy inflation climbed to 102.9% from 83% in February, driven by a surge in the cost of refined products and natural gas, despite tax cuts
- Food prices, which make up roughly a quarter of the consumer basket, rose an annual 70.3%, up from 64.5%
With the central bank on the sidelines, Erdogan's government is trying to contain prices by means of a new round of value-added tax cuts on some staple products, which will go into effect by April. But the changes represent a one-off measure that's unlikely to move the needle for prices.
“We believe that inflationary pressures should be addressed via monetary policy rather than minor fiscal adjustments,” said Deutsche Bank AG economist Fatih Akcelik before the data release.
©2022 Bloomberg L.P.
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