Turkey inflation jumps to 15-month high, pressuring central bank

Turkish inflation accelerated to the highest level since August 2019, increasing pressure on the central bank to raise interest rates for the third time in four months.

The inflation rate rose to 14 percent in November from 11.9 percent in October, the Turkish Statistical Institute said on Thursday. Annual price increases were expected at 12.7 percent, according to a survey of 23 economists by the state-run Anadolu news agency.

Prices rose by 2.3 percent month-on-month.

Turkey’s central bank has hiked interest rates to 15 percent from 8.25 percent since September to rein in inflation and to defend the lira, which has dropped to successive record lows against the dollar. Monetary policymakers may now need to raise interest rates again, despite claiming last month that any acceleration in inflation would be temporary, economists say.

"Hard to see the central bank not hiking rates again at the next Monetary Policy Committee meeting later this month," said Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London. "Inflation is being driven by pass thru from FX devaluation and it’s a circular problem as high inflation is driving dollarisation and devaluation pressures."

The lira fell after the data was released, but then rose after Turkish Treasury and Finance Minister Lütfi Elvan said that monetary and fiscal policy would work in tandem to ensure price stability and managing inflation expectations. The currency traded up 0.4 percent at 7.818 per dollar at 3:58 p.m. local time. 

The lira has lost about a quarter of its value this year as Turkish deposit holders purchased foreign currency to protect their savings and foreign investors pulled capital out of the country. It hit an all-time low of 8.58 per dollar on Nov. 6 and has traded as high as 7.5 per dollar since.

The central bank has spent tens of billions of dollars of its foreign currency reserves defending the lira this year as it kept interest rates at below annual inflation to back government economic stimulus. As a result, its net reserves, minus liabilities, stood at a negative $47.9 billion at the end of October.

Annual producer price inflation accelerated to 23.1 percent last month from 18.2 percent in October, the statistics institute said. Prices rose by 4.1 percent month-on-month.

Turkish President Recep Tayyip Erdoğan sacked and replaced the governor of the central bank in early November after reportedly being told about the sharp erosion of the bank's foreign exchange reserves. Erdoğan brought in Naci Ağbal, a former finance minister and his chief adviser on budgetary affairs.  

When hiking interest rates to 15 percent from 10.25 percent last month, the central bank said any increases in November inflation would be temporary. It pledged to "sustain" tight monetary policy without signalling whether it may hike interest rates at its next monetary policy meeting on Dec. 24.

Economists are concerned that, rather than acting proactively to rein in price increases, the central bank will do the bare minimum to ensure lira stability while continuing to support the government's pro-economic growth policies at the expense of inflation. Erdoğan maintains that higher interest rates are inflationary, a view that jars with conventional economic theory.

"The central bank assumes (hopes?) the uptick is temporary," said Erik Meyersson, senior economist at Swedish bank Handelsbanken. "They had the chance to raise rates higher to accommodate any uncertainty that arises from this higher inflation but didn't take it. Problem is, this could be interpreted as they're still in minimum action mode."

As well as lira weakness, consumer price inflation may be pressured by a pass-through from higher producer prices.

A November survey of manufacturers by the central bank published this week showed 39 percent of companies predicting an increase in their selling prices over the next three months, the highest level since September 2018, when a currency crisis swept through financial markets.

The government expects inflation to end the year at 10.5 percent, according to an economic programme announced in late September. Turkish Treasury and Finance Minister Berat Albayrak, the programme's architect, has since resigned and been replaced by Elvan, a former deputy prime minister and head of parliament's budget committee.

(This article was updated with finance minister's comments in the sixth paragraph.)