Turkey Inflation Rate

Turkey has, and has had for quite some time, an inflation problem. Last October, inflation hit a 24-year high of 85.5 percent on an annualized basis, meaning prices nearly doubled. This year, inflation has tempered from very high to somewhat high and is heading back toward being unsustainable. The kind of inflation that Turkey has on a monthly basis causes spasms of panic in the United States or Western Europe on an annual basis. In June, inflation was close to 40 percent year-on-year. In July, it was nearly 50 percent, and in August, it was nearly 60 percent. Investment banks and the government are in agreement that inflation will likely hit 65 percent by the end of the year. Ankara optimistically hopes to halve the inflation rate by next year.

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"However, bringing inflation down to much lower levels will require monetary policy to remain tight for a prolonged period and we expect the central bank to leave interest rates unchanged throughout 2024," Peach added.

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Turkey almost doubled interest rates on Thursday as part of efforts to combat rampant inflation and attract foreign investment, marking an apparent departure from President Recep Tayyip Erdoan's long-standing economic mantra of keeping rates low.

Still, this U-turn on rates marks a high-stakes political gambit for Erdoan. After winning a third term in the presidential election last month with 52 percent of the vote, he now faces a battle to rein in the country's brutal cost-of-living crisis, which is widely seen as being fueled by his "unorthodox" strategy of insisting that low interest rates will contain inflation, currently running around 40 percent.

Erdoan is hedging his bets politically on the anti-inflation strategy. On the one hand, he has brought in a new team of mainsteam financial experts to prescribe the bitter medicine needed to control runaway prices, but he is also simultaneously distancing himself from rate hikes by insisting that he still believes slashing rates will tame spiraling costs for basic goods and staple foods.

"Some friends should not make the mistake of thinking whether the president is going through a big change in interest rate policies. I am the same here," he said only last week. "We have worked with a low interest rate, low inflation theory. I still work with the same understanding."

Ahead of Thursday's decision, Dimitar Bechev, an expert on Turkey at the University of Oxford and author of a book on Erdoan's politics, told POLITICO any policy changes may not last long. "We have had similar episodes before," he said, pointing out the last governor of Turkey's central bank to publicly push for rate hikes was sacked by the president after less than six months in the job.

However, productivity growth has slowed as reform momentum has waned over the past decade, and efforts have turned to supporting growth with credit booms and demand stimulus, intensifying internal and external vulnerabilities. High private sector debt, persistent current account deficits, high inflation, and high unemployment have been exacerbated by macro-financial instability since August 2018.

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Macro-financial conditions have become increasingly challenging: CPI inflation reached a 24-year high, the heterodox regulatory policy restraints have started to slow credit growth and align lending rates with the reductions in the policy rate. The banking sector continues to have adequate forex liquidity buffers to cover short-term liabilities, however, there are concerns about the accessibility of those buffers in times of stress. Rising exposure of banks through incentivized holdings of government bonds also increases contagion risks.

The outlook is shrouded by considerable uncertainty and risk under the current macroeconomic policy mix. Post-election economic performance will depend on policy decisions to gradually phase out the heterodox regulatory web that distorts financial markets, and the adoption of macroeconomic policies to rebuild buffers and support investor confidence. Inflationary pressures could arise from fiscal expansion and earthquake-induced agricultural and logistics disruptions. External risks remain elevated given the high current account deficit and low net forex reserves; high external share of public debt slower than expected recovery in the EU; and tightening global liquidity. There is also a risk that investor confidence will falter, intensifying pressure on the Turkish lira, external balances, and corporate and bank balance sheets with the possibility that policy responses cause a real sector contraction.

One sentence summary: A conventional monetary policy increasing policy rates following an increase in Turkish inflation or a depreciation of Turkish lira would be optimal to achieve and maintain price stability in Turkey.

Although inflation rates in many emerging markets have decreased over time due to having successful monetary policies, the current Turkish inflation deviates by having one of the highest rates among emerging markets (i.e., the second following Argentina). As Turkey has an inflation targeting regime with an independent central bank which states "The primary objective of the Bank is to achieve and maintain price stability." on its webpage, where price stability is highlighted, the drivers of Turkish inflation are important to understand to form optimal policy not only in Turkey but in also other emerging markets that have an inflation targeting regime.

Accordingly, this paper attempts to understand the drivers of Turkish inflation by using a structural vector autoregression (SVAR) model, where monthly data on global oil prices, unemployment rate, inflation rate, policy rate and exchange rate are used. The empirical investigation is based on monthly data covering the period between 2005:M1 and 2021:M8. The results based on impulse response functions suggest that policy rate pass-through into Turkish inflation is negative and significant, where 1% of a change in the policy rate results in about 0.7% of a reduction in inflation in the long run. The exchange rate-pass through into Turkish inflation is about 26%, whereas the oil price pass-through into Turkish inflation is about 14% in the long run.

The historical decomposition analysis further suggests that Turkish inflation has historically been driven by shocks of global oil prices and exchange rates, where the contribution of the latter has increased over time. Although policy rate shocks have also contributed to inflation historically, this contribution has been limited compared to those by shocks of exchange rates and global oil prices. The forecast error variance decomposition of Turkish inflation additionally suggests that about 40% of its variance is explained by global oil prices, whereas about 17% of its variance is explained by exchange rate movements.

To summarize, the empirical results suggest that Turkish inflation is mostly driven by shocks of global oil prices and exchange rates. The empirical results also show that the contribution of positive policy rate shocks to Turkish inflation is negative and significant, although the magnitude of the contribution is relatively less compared to those of global oil prices and exchange rates. As additional results show that exchange rate depreciation can be reduced by higher policy rates, it is implied that a conventional monetary policy increasing policy rates following an increase in inflation or a depreciation of Turkish currency (lira) would be optimal to achieve and maintain price stability in Turkey, which is the primary objective of CBRT.

Turkey intervened militarily on Cyprus in 1974 to prevent a Greek takeover of the island and has since acted as patron state to the "Turkish Republic of Northern Cyprus," which only Turkey recognizes. A separatist insurgency begun in 1984 by the Kurdistan Workers' Party (PKK), a US-designated terrorist organization, has long dominated the attention of Turkish security forces and claimed more than 40,000 lives. In 2013, the Turkish Government and the PKK conducted negotiations aimed at ending the violence, however intense fighting resumed in 2015. Turkey joined the UN in 1945 and in 1952 it became a member of NATO. In 1963, Turkey became an associate member of the European Community; it began accession talks with the EU in 2005. Over the past decade, economic reforms, coupled with some political reforms, have contributed to a growing economy, although in recent years, the government's growth-by-any-means strategy has sent inflation to historic highs and tested the broader financial system's resilience.

the most densely populated area is found around the Bosporus in the northwest where 20% of the population lives in Istanbul; with the exception of Ankara, urban centers remain small and scattered throughout the interior of Anatolia; an overall pattern of peripheral development exists, particularly along the Aegean Sea coast in the west, and the Tigris and Euphrates River systems in the southeast 2351a5e196