Turkey’s official March annual inflation up 2 pp at 69% y/y, but monthly figure falls again

Turkey’s official March annual inflation up 2 pp at 69% y/y, but monthly figure falls again
*ENAG is an Istanbul-based inflation research group of economists that produces alternative readings on Turkey's price movements. / bne IntelliNews
By Akin Nazli in Belgrade April 3, 2024

Turkey’s consumer price index (CPI) inflation officially stood at 69% y/y in March versus 67% y/y in February and 38% y/y in June last year, the Turkish Statistical Institute (TUIK, or TurkStat) said on April 3 (chart).

Some mainstream media headlines confusingly suggest that Turkey’s official annual inflation series is unexpectedly moving upwards, even though it was anticipated that rate hikes would quickly stop the gains. As usual, things are not so simple. 

Note that TUIK also posted March official inflation of 3% m/m versus 5% m/m in February and 7% m/m in January.

On February 5, when the January data was announced, Turkey’s finance minister, Mehmet Simsek (@memetsimsek), said in a tweet that TUIK would release significantly lower monthly inflation rates starting from February.

“Monthly inflation declined in March in line with our forecast,” he wrote on April 4 in another tweet.

Simsek is pretty good at forecasting TUIK’s official data releases. Perhaps that’s because he worked as an economist at the US embassy in Ankara and then at Merrill Lynch. He has to be using some high-level econometric models for his forecasts. What kind of models the TUIK is using has of course been a longstanding question. “Turkey – Are you kidding me?” wrote a Commerzbank emerging markets strategist as far back as 2017 when presented with a bunch of seemingly barmy TUIK data.

At 69% y/y, Turkey remains in fifth place in the world inflation league.

The Istanbul-based ENAG inflation research group of economists, meanwhile, has calculated a Turkish inflation figure of 125% y/y for March. The ENAG figure recorded for February was 122% y/y, while for June last year it was 109% y/y.

TUIK also gave an official figure of 51% y/y for producer price index (PPI) inflation in March.

Following the national elections held in May last year, another wave of currency depreciation coupled with widespread tax hikes dynamited pricing behaviour in the country once again.

In June 2023, following the post-election appointment of Turkey’s new economic team led by Simsek, the Erdogan regime launched a tightening process that is ongoing. The policy rate was hiked to 50% by March from 8.5% in June.

Disinflation will be established in the second half of this year, the monetary policy committee (MPC) of Turkey’s central bank reiterated on March 21, when it delivered its latest 500bp rate hike.

In the coming period, the MPC will continue to track the official monthly inflation series. TUIK is set to deliver further outcomes in the 2-3%s for the official monthly headline indicator.

On February 8, the central bank kept its end-2024 official inflation estimate unchanged at 36% in its quarterly inflation report while its new governor, Fatih Karahan, said that the central bank saw the official series peaking at 73% in May.

According to central bank deputy governor Cevdet Akcay, the 36% end-2024 official inflation “target” was ambitious, but the regulator, he said, was setting out to be ambitious.

That tends to suggest that the central bank actually sees the end-2024 inflation figure at a higher level, but is nevertheless keeping to its previous estimate as the target level.

According to Karahan, average official monthly inflation will decline to 1.5% in 4Q24.

On May 9, the central bank will release its next inflation report and updated forecasts.

The monetary policy personnel are also aiming for real appreciation in the lira, which means that the rise in the USD/TRY pair should remain below official inflation. It all depends on the finance industry’s portfolio inflows.

Since last month, the Erdogan regime has returned to its straight-line policy in the USD/TRY rate. The line has been drawn around the 32-level this time around.

From time to time, the regime chances its arm at applying pressure on the pair. Some 31s are seen but do not last long.

Looking at the global markets, as things stand they do not suggest any notable turbulence. Turkey’s five-year credit default swaps (CDS) remain above the 300-level, while the yield on the Turkish government’s 10-year eurobonds remains below the 8%-level.

The next MPC meeting is scheduled for April 25. The rate-setters at this point look set to stick with the 50% benchmark.

With the local elections done and dusted, and with Turkey’s policy rate having ascended to what could be a peak, the course of the USD/TRY is again under scrutiny.

When the northward pull on the pair ends, the moment will be seen as signalling the beginning of portfolio inflows and the opening of the window for slowly building up lira papers.

Some more and juicier controlled devaluation could provoke the desired inflows. At the moment, everyone is awaiting some further depreciation in the lira with the traditional pre-election pressure on the USD/TRY pair having dissolved.

Switching to a floating exchange rate regime would be the best course. However, such a move would fire up another inflation wave. And sharp jumps trigger panic-driven demand.

Last time, when the panic occurred, the regime had to introduce the so-called FX-protected deposit scheme (KKM). Now it cannot get rid of it.

Ahead of May, when official inflation will peak, the beginning of rate cuts (currently expected in 4Q24) will be discussed.