Turkey’s annual consumer price inflation jumped further from 12.15% in May to 15.39% in June, taking the rate up to the highest level recorded since 2003, the Turkish Statistical Institute (TUIK) announced on July 3.

Markets had expected 13.9% for June, according to a survey by BloombergHT.  The worse-than-expected inflation data has pushed up expectations for the introduction of a rate hike by the next Monetary Policy Committee (MPC) meeting, scheduled for July 24.

“The much stronger-than-expected rise in Turkish inflation in June is likely to prompt the central bank to hike interest rates, perhaps by 100bp, at its meeting later this month,” Jason Tuvey of Capital Economics said in a research note.

The sharp increase in inflation last month largely reflects the impact of the lira’s tumble in May, when the currency dropped to as low as 4.92 against the US dollar before the central bank was forced into an emergency rate hike, Tuvey also said.

The Turkish lira, down 23% against the dollar in the year to date, lost a further 1.06% d/d against the dollar to trade at 4.6660 as of 12:30 local time, despite gains registered by the peer currencies in the emerging markets universe on the day. The benchmark BIST-100 stock market index was slightly up 0.07% to 96,846.

Markets are currently awaiting for the formation of Turkish President Recep Tayyip Erdogan’s new cabinet to be announced on July 8 as well as the direction of fiscal and monetary policies. Erdogan is an economic populist who has openly advanced his unorthodox theory that higher interest rates cause faster inflation and that as executive president he will have a duty to be at the monetary policy helm. 

The risk that interest rate rises could trigger a sudden stop in a substantial amount of economic activity is starting to become pronounced. The central bank has hiked its main funding rate by 500bp to 17.75% in all since April 26.

Turkey’s inflation jumped into the double digits in February 2017. Since then the rate has only once moved back into the single digits, in July last year, which was due to the base effect of an economic soft spot caused by the July 2016 failed coup.

After last November’s 12.98%, there was a slow descent to the March figure of 10.23% before it started to run rampant in the past three months.

Annual food inflation jumped from to 11% in May to 18.89% in June while transportation rose by 24.26% in the month.

Meanwhile, the deterioration in core inflation metrics and producer price inflation worsened in June.

The annual rise in the C-index, one of the central bank’s favourite core inflation indicators, also jumped from 12.64% in May to a fresh record high of 14.60%.

Annual PPI jumped from 20.16% in May to 23.71% in June, the highest level seen since July 2003, TUIK said in a separate statement.

Previously annual PPI fell to 12.14% in January, the lowest level since December 2016, but it has skyrocketed since then in parallel with the depreciation in local currency.

Expectations for Turkey's end-2018 inflation rate rose to 12.28% in June from 11.07% in May, the central bank’s regular survey of businesses and analysts showed on June 11.