Turkey Inflation Undershoots Forecast, Ends Second Year Near 65%

(Bloomberg) — Turkish inflation came just short of a forecast laid out by the central bank, ending the year with an upswing that keeps it on track to accelerate past 70% by May as new risks emerge. Annual price growth quickened to 64.8% in December, according to data released on Wednesday, compared with 62% the previous month and slightly slower than expected.

Restaurant and hotel prices surged 93% in annual terms. The reading was in line with the outlook drawn up by the central bank and the government, a rarity in a country where official forecasts have often proven to be overly optimistic. The government’s decision to raise the official minimum wage by nearly 50% risks faster price increases than implied by the central bank’s expected inflation path.

Prices are on a trajectory that the central bank has said still warrants further monetary tightening after seven consecutive hikes raised interest rates by 34 percentage points since June. Inflation is ending the second straight year at 65% for the first time since the late 1990s. The monetary authority’s latest outlook doesn’t project a slowdown until the second half of this year and expects inflation to end 2024 at 36% — still more than seven times the official target.

Governor Hafize Gaye Erkan will present fresh estimates in February. What Bloomberg Economics Says… “Even faster price gains are in store in the short term. The annual rate is set to surge past 70% in 2Q24, as a partial natural gas discount scheme is expected to end. We see inflation reaching 73% in May.

The deceleration process that starts in June will be long drawn.” — Selva Bahar Baziki, economist. Click here to read more. Under Erkan, appointed in June, the central bank has looked to repair credibility with financial markets in part by issuing more realistic forecasts for inflation. It’s a change from the upbeat assessments usually offered by her immediate predecessor, whose policy decisions took little account of inflation.

Signs have emerged of cooling momentum for prices. A monthly gauge preferred by Finance Minister Mehmet Simsek showed inflation was 2.9% in December from November, the slowest reading since May. Official borrowing costs remain deeply negative when adjusted for current inflation. And core inflation — which strips out volatile food and energy items — accelerated past 70% from a year earlier.

Still, most economists predict the central bank’s cycle of rate hikes will end when the benchmark rises to 45% later this year, from 42.5%. Policymakers have said that the benchmark should be viewed relative to their end 2024 inflation projection. The government’s decision to raise the minimum wage by 49% this year could again push prices higher, however, with some Wall Street banks warning it requires tighter monetary policy in response.

Read more: Turkey’s 49% Minimum Wage Hike Balances Between Unions, Markets The pay hike prompted Ibrahim Aksoy, the chief economist of HSBC Asset Management Turkey, to keep his year end inflation forecast at 45%, nearly 10 percentage points above the central bank’s view for 2024. “The raise is more than our estimate and points to an upward risk,” Aksoy said.

—With assistance from Baris Balci..