Turkey’s Inflation Surges to 68.5% Despite Ongoing Rate Increases

Turkey’s inflation climbs to 68.5% despite continued rate hikes

Turkey’s ongoing battle with inflation continues to escalate, as the annual inflation rate surged to 68.5% in March, marking a slight uptick from February’s 67.1%, as reported by the Turkish Statistical Institute on Wednesday.

The monthly escalation in consumer prices amounted to 3.16%, propelled primarily by increases in education, communication, and the hospitality sector, with respective month-on-month rises of 13%, 5.6%, and 3.9%.

On an annual scale, education experienced the most significant surge in costs at 104% year-on-year, trailed by the hospitality sector at 95% and healthcare at 80%.

In response to the soaring inflation, Turkey has initiated a vigorous campaign, primarily through interest rate hikes. In late March, the country raised its key rate from 45% to 50%.

Turkey's Inflation Surges to 68.5% Despite Ongoing Rate Increases
Turkey’s Inflation Surges to 68.5% Despite Ongoing Rate Increases (Credits: Benzinga)

The recent inflationary pressures are largely attributed to the substantial hike in the minimum wage mandated by the Turkish government for 2024. January saw the minimum wage skyrocket to 17,002 Turkish lira (equivalent to around $530) per month, marking a 100% increase from the previous year.

Economists anticipate further interest rate hikes by the central bank as imperative measures to curb inflation.

Nicholas Farr, an Emerging Europe economist at Capital Economics in London, remarked that while March witnessed the smallest monthly inflation increase in three months, it still falls short of policymakers’ aspirations for single-digit inflation. Farr emphasized the necessity for more aggressive monetary and fiscal policies to combat the persistent inflationary trends.

Turkey’s central bank embarked on a series of eight consecutive interest rate hikes from June 2023 to January 2024, accumulating a substantial 3,650 basis points. Although the tightening cycle seemingly paused in February, the central bank resumed its rate hikes in March, citing a deteriorating inflation outlook and pledging to maintain a tight monetary stance until a significant and sustained decline in monthly inflation is observed.

Turkey's Inflation Surges to 68.5% Despite Ongoing Rate Increases
Turkey’s Inflation Surges to 68.5% Despite Ongoing Rate Increases (Credits: Amos News)

Analysts suggest that with the conclusion of Turkey’s local elections on March 31, advancing tighter monetary policies could encounter less resistance. The elections witnessed a historic setback for President Recep Tayyip Erdogan’s ruling AK Party, with the opposition securing victories in the country’s five largest cities and numerous rural areas. Economic hardships and soaring living costs were pivotal factors contributing to the electoral outcomes.

Erdogan’s persistent reluctance to raise interest rates, despite mounting economic challenges, has been a contentious issue. His unconventional stance, branding interest rates as “the mother of all evil” and advocating rate cuts to tame inflation, has been at odds with conventional economic wisdom. Nonetheless, a shift in policy direction emerged following the appointment of a new finance and central bank team in May 2023, signaling a degree of independence for the central bank from the executive branch.

However, the recent electoral setback for Erdogan’s party introduces an element of uncertainty regarding future economic policies. Analysts speculate on the potential ramifications of the electoral outcomes on Erdogan’s policy decisions, though the absence of elections until 2028 suggests a departure from extraordinarily loose monetary policies is improbable.