Turkey's Inflation Surges to 67.1% in February

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Turkey grappled with a further surge in annual inflation in February, hitting 67.1 percent, despite a series of aggressive interest rate hikes, official data revealed on Monday. The Turkish central bank opted to maintain its key interest rate at 45 percent last month, marking a pause after eight consecutive increases aimed at reining in consumer prices, which had stabilized at 64.9 percent in January.

While the monthly inflation rate climbed by 4.5 percent in February, it represented a deceleration compared to the 6.7 percent uptick registered in January. Nonetheless, inflation remains a pressing concern for President Recep Tayyip Erdogan's administration, particularly in the lead-up to the local elections scheduled for March.

President Erdogan's AKP party is actively seeking to regain control of major urban centers, including Istanbul and Ankara, which are currently held by the main opposition party. Erdogan reiterated on Sunday that the effects of anti-inflation policies would gradually manifest toward the end of the year.

The Turkish Statistical Institute disclosed that the annual consumer price inflation surged to 67.07% in February, surpassing expectations. Analysts surveyed by Reuters had projected a climb to 65.7% last month. Notably, the sectors of hotels, cafes, and restaurants experienced the most significant annual price inflation increase at 94.78%, followed by education at 91.84%.

Moreover, health and transportation witnessed substantial inflation rates of 81.25% and 77.98%, respectively. Food and non-alcoholic beverage prices surged by 71.12% year-on-year, accompanied by an unexpectedly large monthly rise of 8.25%.

The pronounced inflationary pressures have prompted concerns that Turkey's central bank, which previously hinted that its aggressive rate-hiking cycle had concluded, might need to resume tightening monetary policy. Liam Peach, a senior economist at Capital Economics in London, highlighted the unexpectedly sharp rise in inflation to 67.1% in February, expressing concerns over persistent core price pressures.

Peach emphasized that if core inflation remains elevated, the likelihood of the central bank restarting its tightening cycle will escalate in the coming months. Some analysts have forecasted a gradual decline in inflation to approximately 35% by the year's end, yet recent data suggests that inflationary pressures persist, posing setbacks to the disinflation process.

Turkish Finance Minister Mehmet Simsek acknowledged that inflation would remain elevated in the first half of the year due to base effects and the delayed impact of previous rate hikes. However, he expressed optimism that inflation would moderate over the next 12 months. The persistently high inflation has been fueled by the dramatic depreciation of Turkey's currency, the lira, which hit a record low against the dollar.

At noon local time on Monday, the lira was trading at 31.43 against the greenback, marking a 40% decline in the past year and an 82.6% plunge over the last five years. Timothy Ash, an emerging markets strategist at BlueBay Asset Management, described the inflation figures as disappointing, attributing the downward pressure on the lira to the central bank's efforts to unwind FX-linked deposit accounts and rebuild foreign exchange reserves.

Analysts observe that Turkish policymakers have been reluctant to implement further rate hikes, particularly ahead of the impending local elections. However, the relentless uptrend in inflation may necessitate additional tightening measures post-election. Turkey's key interest rate currently stands at 45%, following a cumulative increase of 3,650 basis points since May 2023.

Ash suggested that favorable base period effects could instigate a more favorable economic trajectory by mid-year. Nevertheless, he cautioned that the central bank might need to implement further rate hikes following the local elections to contain inflationary pressures effectively.

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