Turkish Inflation Nears 70% With Peak Likely Around Corner

(Bloomberg) -- Turkey’s inflation rate, already one of the world’s highest, accelerated for the sixth straight month, as government policies such as wage hikes counter aggressive interest-rate increases.

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Consumer prices grew 69.8% from a year earlier, the fastest since late 2022 and up from 68.5% in March. The median estimate in a Bloomberg survey of economists was just over 70%.

Monthly price growth, the central bank’s preferred gauge, was steady at 3.18%. Turkish monetary authorities have said that annual inflation probably won’t peak until this month, before slowing to 36% by the end of the year.

The central bank is likely months away from starting to cut borrowing costs. It’s lifted its key rate to 50% from 8.5% in June, marking a U-turn after several years of heeding President Recep Tayyip Erdogan’s calls for ultra-loose monetary policy.

“Inflation is below expectations and the lira is performing well,” said Onur Ilgen, head of Treasury at MUFG Bank Turkey AS. “I don’t think there is a need for an additional interest-rate hike with the continuation of the lira’s positive course.”

Governor Fatih Karahan pointed to lingering inflationary concerns, including in the services sector, when the central bank held rates last week.

The latest figures provided further evidence that price pressures remained elevated in April.

Services inflation quickened to an annual 97% from 96.5% in March, according to official data. Price gains in core consumer goods — an index that strips out the impact of volatile items such as food and energy — accelerated to 75.8% from 75.2%.

Investors are scrutinizing Turkey’s progress in slowing inflation so they can time a return to a country whose local bonds were once a magnet for foreign buyers.

While inflows have been slow in recent months despite the high returns on offer, overseas investors stepped up purchases of Turkish government bonds last week. Foreigners bought a net $604 million of the notes in the seven days through April 26, the most in nearly five months.

Wall Street banks such as Citigroup Inc. and JPMorgan Chase & Co. now recommend buying the lira. HSBC Holdings Plc has called Turkey “one of our favorite markets.”

A steadier currency could offer a possible respite from inflation by helping hold back the cost of imported goods. Having depreciated nearly 4% against the dollar in March, the lira was mostly flat last month. It’s down almost 9% in the year to date and trading around 32.4 versus the US currency.

The lira has lost almost 80% of its value since the start of 2021, a performance blamed by many economists and investors on the central bank’s dovish stance.

What Bloomberg Economics Says...

“Turkey’s April inflation surprised to the downside, but underlying dynamics still warrant a more restrictive stance from the central bank. We see policymakers delivering the necessary tightening through alternative tools rather than an interest rate hike.”

— Selva Bahar Baziki, economist. Click here to read more.

“We think encouraging policy signals will contain downward pressure on the lira,” Maya Senussi of Oxford Economics said in a report before the data release. “The risk of faster nominal depreciation is still substantial given the inflation outlook and upside risks from global rates, oil prices, and geopolitics.”

Worsening sentiment among households adds another complication. Turks see inflation at 96% at the end of the year, according to a survey by Koc University researchers and pollster Konda. That’s more than double the projection in a recent central bank poll of financial-market participants.

Monetary policy will remain tight until there’s “a significant and sustained decline in the underlying trend of monthly inflation,” the central bank has said. It’s signaled further rate rises are possible if it identifies “a significant and persistent deterioration” in the outlook for inflation.

--With assistance from Joel Rinneby and Tugce Ozsoy.

(Updates with data on inflows in 10th paragraph.)

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