Turkey inflation climbs to 12.6 percent, exceeding all predictions

Turkey’s consumer price inflation accelerated to 12.6 percent in June, climbing at a faster pace than economists predicted.

The annual inflation rate rose from 11.4 percent in May, the Turkish Statistical Institute said in a statement on Friday. The rate was the highest since August last year.

The level of CPI exceeded all estimates in a Reuters survey. Inflation was seen at 12.1 percent, the survey showed, with the estimates of 14 economists ranging from 11.9 percent to 12.5 percent, Reuters reported on Monday.

Turkey’s central bank kept its benchmark interest rate on hold at 8.25 percent in a decision last week, warning of a slight deterioration in short-term inflation expectations. That ruling of the bank’s Monetary Policy Committee ended nine-straight reductions that had reduced the rate from 24 percent inside a year.

The uptick in inflation in June was led by a rise in food and non-alcoholic beverage prices of an annual 12.9 percent. The cost of alcohol and tobacco surged by 22.4 percent after government tax increases. Inflation for miscellaneous goods and services jumped by an annual 19.8 percent.

The lira was little moved by the worsening inflation data, trading down 0.1 percent at 6.85 per dollar.

Inflation in Turkey has accelerated from 8.6 percent in October as the central bank acted on government requests to reduce borrowing costs for banks. President Recep Tayyip Erdoğan, who maintains that higher interest rates are inflationary, sacked and replaced the bank’s governor last summer saying he failed to cut rates and thereby support efforts to stimulate economic growth and slow inflation.

"In the new world order of central banking with QE, negative rates, et al, and central bankers judged by how much inflation they can create, then the CBRT should get the gold medal," said Tim Ash, senior emerging market strategist at BlueBay Asset Management in London. "The problem is that it means more dollarisation, pressure on the lira and loss in reserves."

The central bank’s year-end inflation estimate is 7.4 percent. Financial professionals and business leaders questioned in a monthly economic survey by the central bank in June expected inflation of 9.5 percent by December.

Inflation is also under pressure from lira weakness. The currency hit an all-time low of 7.269 per dollar in early May. It traded at around 6.85 per dollar on Friday, still down about 13 percent since the start of the year.

Declines for the lira make imports more expensive. Turkey imports nearly all the energy it consumes and many of its finished goods and exports are comprised of imported raw materials and unfinished items.

Producer price inflation accelerated to 6.17 percent in June from 5.53 percent in May, the institute said.