Turkey’s annual inflation rate slightly declined to 11.72% in May after hitting 11.87% in April, the highest level recorded since October 2008, statistics office TUIK announced on June 5.

Since the failed attempt at overthrowing the government last year, Turkish ministers have been pushing stimulation efforts to boost economic growth. Measures including more bank lending at cheaper rates have been pursued, even though strong domestic demand supported by loans carries with it the risk of higher inflation as well as higher current account and budget deficits. 

The May inflation figure amounts to an anticipated retreat from April's peak point. However, annual inflation is still rather high and political pressure on the central bank to cut policy rates amid high inflationary pressures increased following the April 16 referendum on introducing an executive presidency.

Consumer prices in May rose 0.45% m/m following a 1.31% m/m rise in April. 

The lira gained a limited 0.11% d/d against the USD to trade at 3.5069 per dollar as of 10:20 local time on June 4, following the release of the inflation data.

Food prices were down 0.55% m/m, shaving 0.11pp from headline inflation. Clothing prices increased 5.97% m/m in May due to the new season, adding 0.41pp.

Transport costs declined by 0.73% m/m in the month, shaving another 0.11pp from overall CPI inflation in May.

The C-index, one of the central bank’s favourite core inflation indicators, increased by 1.33% m/m in May, bringing the annual rise to 9.38%.

The outlook on the domestic producer price front was similar. Annual inflation in domestic producer prices deescalated to 15.26% in May from 16.37% in April, the highest level since July 2008.

Producer price inflation is on a seven-month long trend of escalation, rising from September 2016’s 1.78% to April’s eight-year high of 18.41%, moving in parallel with the lira’s depreciation.

Last month, Turkey’s central bank revised up its end-year inflation expectation for 2017 to 8.5% from its previous forecast of 8%. The World Bank is forecasting a quickening of annual inflation to 9% at the end of 2017 from last year’s 8.5%.

The IMF predicts that Turkey’s CPI inflation will come in at 10.1% for this year but decline to 9.1% in 2018.

Inflation will start falling in May and will end the year at 8.5% or below, Economy Minister Nihat Zeybeci predicted in April. Turkey will see a single-digit inflation rate by the end of 2017, Deputy Prime Minister Nurettin Canikli told reporters in London on May 3.

S&P Global Ratings expects inflation in Turkey to moderate over the forecast horizon through the year-end of 2020, but it said last month that “given the lira's volatility, risks remain that the Turkish central bank's monetary policy response may prove insufficient to anchor its inflation targeting regime, particularly if domestic or geopolitical instability were to flare up in the coming months”.

The rating agency’s negative outlook on Turkey’s 'BB/B' rating reflects risks that weak growth and exchange rate volatility could lead to fiscal deterioration or inflationary pressures beyond what the agency currently projects.

“We could revise the outlook to stable if Turkey's fiscal position remained in line with a moderating government debt-to-GDP ratio and inflationary pressures abate, likely reflecting a stabilisation in the lira exchange rate and a gradually improving external and domestic growth scenario,” S&P said on May 5.