Turkish Inflation Slows Sharply After Interest Rate Hikes

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(Bloomberg) — Turkey’s annual inflation eased sharply in August, as 50% borrowing costs filter through to the economy and dampen demand.

Price growth slowed to 52% year-on-year from 62% the previous month, state statistics office data showed Tuesday. That was in line with analysts’ forecasts, according to a Bloomberg survey.

While the data shows that high interest rates are starting to slow one of the world’s highest rates of inflation, the latest figure is still more than 10 times the central bank’s official target. The decrease is also partly due to base effects, with readings having spiked in 2023.

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Officials aim to reduce inflation to 38% at the end of the year, though most economists think that it’ll be closer to 42%, the upper band of the central bank’s forecast range.

The central bank also focuses heavily on monthly inflation, which slowed to 2.47% from 3.23% in July, slightly higher than what economists expected.

The rise in interest rates from 8.5% since June 2023 has marked a transformation in Turkey’s economic management. For years until then, the central bank had kept monetary policy ultra-loose, with President Recep Tayyip Erdogan arguing that was the best way to slow inflation.

The pivot to a more orthodox stance has been welcomed by foreign bond investors, who have returned to Turkish markets, buying more than $10 billion of debt securities this year. Still, businesses and many Turks are suffering as high rates weaken the economy.

In August, education fees saw the biggest increase in inflation, followed by housing.

Food and non-alcoholic beverage prices declined on a monthly basis but rose 44.9% annually. Core inflation, which strips out volatile items like energy and food, dropped by almost 10 percentage points to just under 52% in annual terms.

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Selva Demiralp, a professor of economics at Istanbul-based Koc University, said the central bank will struggle to reach of goal of 14% inflation by the end of 2025 without a further slowdown in the economy.

“The growth rate needs to slow further,” she told Bloomberg TV shortly before the inflation data was announced.

Demiralp sees inflation at 45% at the end of this year and 33% 12 months later.

The International Monetary Fund said last week that Turkey needs to complement high interest rates with tighter fiscal policies.

“Fiscal, monetary, and incomes policies will all need to work together,” it said in an assessment of the Turkish economy. “While there would be a short-term cost to growth from tighter policies, a rapid disinflation is more likely to be sustainable, and would strengthen medium-term growth and financial stability.”

Households and businesses see higher prices than monetary officials do in the next 12 months. That’s a challenge for the central bank, since they could accelerate their purchases or shift their pricing behavior based on their own assumptions.

“Inflation expectations continue to pose an upside risk to the inflation outlook,” the central bank said at its last rate meeting on Aug. 20. It’s held its base rate at 50% since March and implied it’s in no rush to start cutting.

(Updates throughout.)

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