The lira’s recent poor performance, which is one of its worst periods in many years, is hindering the improvement of Turkish inflation. This is happening as President Recep Tayyip Erdogan’s new economic team is undoing the unconventional measures that were implemented to stabilise the currency.
Inflation falls in June
Turkey experienced the least decrease in consumer prices since the onset of a slowdown in November, as the lira’s extended period of poor performance has led to increased import costs.
According to official data released on Wednesday, inflation in June came at 38.2% compared to the previous year. This figure was slightly lower than predicted and represented a decline from May’s inflation rate of 39.6%. Core inflation increased 47.3% annually, which is higher than the previous month’s annual reading of 46.6%. This indicates that price pressures remain high.
Weaker lira increases price pressures
Although the significant declines in the lira did not completely disrupt the trend of decreasing inflation, the currency depreciation is pushing prices up. The lira has weakened at a time when the government is trying to introduce such measures as the temporary increase of 34% in the minimum wage and considering raising salaries and pensions for civil servants.
The lira fell significantly against the US dollar following President Recep Tayyip Erdogan’s re-election victory in May and the restructuring of his economic team. President Recep Tayyip Erdogan had previously put pressure on the central bank to keep rates lower.
Achieving price stability will be challenging as two former Wall Street bankers try to reverse years of complex regulations and unorthodox economic policies that kept the lira supported but depleted central bank reserves. When the central bank reviewed rates last month, one of their top concerns was a weaker lira, as policymakers focus on tightening monetary policy.
Under its new governor Hafize Gaye Erkan, Turkey’s central bank considerably raised its key interest rate to 15% at its last meeting in June, but even this 650-basis-point hike disappointed some analysts, who expected an even stronger response.
What economists say
Selva Bahar Baziki expects government policies and the sharp lira depreciation to push inflation higher, accelerating towards the end of the year to 47%. With inflation anticipated to rise higher, the pressure is on for the newly appointed Finance Minister Mehmet Simsek and central bank Governor Hafize Gaye Erkan. Policymakers have noted that a return to a more orthodox approach will be gradual, as they attempt to hike rates for the first time in over two years.
On Monday, the central bank said that their decision to raise the benchmark rate to 15% from 8.5% is an attempt to “establish the disinflation course as soon as possible.”
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