Turkish lira rally begins to slow underlying inflation

Turkish manufacturers reported the slowest increase in output costs in 10 months in February in a further sign that the lira’s recent rally is impacting inflation rates.

The lira’s appreciation also meant that input costs rose at the slowest pace since July, IHS Markit and the Istanbul Chamber of Industry (ISO) said in a monthly survey of the manufacturing industry published on Monday.

The survey follows an announcement this week by the Istanbul Chamber of Commerce (ITO) that wholesale price inflation slowed to an annual 16.2 percent in February from 17.8 percent the previous month. Prices rose by 0.36 percent month-on-month compared with 1.31 percent in January, it said.

Turkey’s central bank is seeking to curb inflation through hikes to the benchmark interest rate after a slump in the lira’s value last year led to accelerating price increases. It targets consumer price inflation (CPI) of 9.4 percent by the end of the year. The rate edged up to 15 percent in January from 14.6 percent in December.

“Although supply issues are causing higher raw material prices globally, an appreciation of the Turkish lira has helped to mitigate these pressures,” Andrew Harker, economics director at IHS Markit, said in the report.

Producer price inflation accelerated to an annual 26.2 percent in January from 25.2 percent in December, the Turkish Statistical Institute said last month. That was the highest level since mid-2019.

The Turkish lira slid by about 20 percent against the dollar in 2020, reaching a record low of 8.58 in early November, pressuring inflation. It has since strengthened to trade at around 7.3 per dollar.

The impact of the lira’s weakness is still being felt in the economy. CPI is expected to accelerate to 15.5 percent in February, the state-run Anadolu news agency reported last week, citing an average estimate of 19 economists. Rising food prices have pressured CPI and the rate may trend higher in the coming months, economists say.

The statistical institute will report February inflation rates on Wednesday.

A benchmark measure of the manufacturing industry by IHS Markit and the ISO showed a further improvement in business conditions in February. The Turkey PMI Manufacturing Index posted a reading of 51.7 points last month compared with 54.4 points in January. Any reading above 50 indicates overall improvement in the sector.