Inflation in Turkey rose higher than expected last month to 67%. This is a rate not seen in a very long time for Ankara. The central bank held rates steady after a sustained string of hikes since June of 2023.

Turkey’s central bank unexpectedly raised interest rates by 500 basis points overnight for a 50% increase, only 10 days before the nationwide local elections.

Ankara leadership cites a deteriorating inflation outlook for the remainder of the year, and has pledged to tighten it even further if significant and persistent increases in inflation occur.

Inflation Prediction

Though inflation is expected to drop around the middle of 2024, the recent decline in the valuation of the lira tied with Turkey’s declining foreign reserves has raised the expectations of more rate hikes.

This comes ahead of Turkish elections but will not take place until after the March 31 municipal vote, where Erdogan’s AK Party is trying to win back political control in key cities like Istanbul.

In a recent Reuters poll, over 90% of respondents expected the bank to keep the rate steady in March. While the other ten percent forecasted a hike of only 250 basis points.

The poll showed however that a strong majority of respondents expected it to hike again later this year to keep rising inflation in check.

Credit Crunch

The Turkish central bank took other strong steps to tighten credit availability including action on reserve requirements. This move prompted some banks in Turkey to either reduce loan limits or even stop offering loans all together.

It has also raised the maximum interest rate on credit card cash withdrawals to keep credit card limits from increasing drastically as a result of the economic policies.

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Tighter fiscal policy is expected after the coming elections to ensure a victory. Adding to this is rising cost of living for residents with the compounding economic pain after what was already years of experiencing cost-of-living crisis.

Earlier this month, The Turk Finance Minister Mehmet Simsek promised additional steps to help the Turkish central bank reduce the runaway inflation.

“Fiscal stimulus packages” cooled significantly after last year’s general elections but have picked up a bit in recent months ahead of this next election. This is the Turkish government’s strategy of ensuring there is favourable political activity to ahead of the vote.

Market Perceptions

“You can read into the rate hike that Simsek and the central bank have the capacity to be more aggressive, upcoming election or not”

Peter Kisler, EM Portfolio Manager at Trium Capital in London.

Last Friday, the Turkish central bank’s monthly survey of market participants’ expectations showed that Turkey’s year-end annual inflation was perceived as even higher than the Bank’s forecast rate.

Market participants’ expect that Turkey’s year-end annual inflation will be at 44.19%, which is almost 9% higher than the bank’s own forecast of 36%.