One of the lira’s worst stretches in decades is getting in the way of a turnaround in Turkish inflation as President Recep Tayyip Erdogan’s new economy team reverses the unorthodox policies used to tether the currency.
Though its steep declines didn’t completely break the disinflation momentum last month, the depreciation is stirring up price pressures just as the government moves ahead with measures that include an interim hike of 34% in the minimum wage. The lira has lost about a quarter of its value against the dollar since Erdogan’s reelection victory last month.
The likely result is the smallest deceleration in consumer prices since a slowdown that began last November. Data due Wednesday will show annual inflation fell slightly below 39% in June from 39.6% the previous month, according to a Bloomberg survey of analysts.
“The impact of strong base effects” from last year was “offset by sharp lira depreciation following the elections,” Goldman Sachs Group Inc. economists including Basak Edizgil said in a report. “Although policy has turned tighter since the elections, further FX weakness is likely to aggravate core inflation going forward.”
Read more: Lira Slump Deepens as Turkey Insists on Gradual Changes
Price stability will prove elusive as two former Wall Street bankers now in charge of the economy undo years of complex regulations and fringe policies that kept the lira in check by burning through central bank reserves.
What Bloomberg Economics Says...
“Looking ahead, we expect government policies and the sharp lira depreciation to result in the inflation rate climbing again. In our view, price gains will accelerate toward a year-end rate of 47%, even after the central bank’s policy pivot to lifting borrowing costs.”
— Selva Bahar Baziki, economist. Click here to read more.
The threat of another inflation spiral adds urgency for newly installed Finance Minister Mehmet Simsek and central bank Governor Hafize Gaye Erkan. Policymakers have for now signaled that a return to a more conventional approach will be gradual, as they remove support for the lira and raise interest rates for the first time in over two years.
In the months ahead, analysts expect inflation to accelerate past 40% again and stay there through the first half of 2024. Bloomberg Economics revised its year-end call to 47% from 43%, meaning price growth may run at over nine times the official target of 5%.
A weaker lira was top of mind as the central bank reviewed rates last month, according to minutes of the meeting, which marked what it called was the “first step” of a monetary tightening cycle.
The decision to increase the benchmark to 15% from 8.5% — a move that fell short of many forecasts — was meant to “establish the disinflation course as soon as possible,” the central bank said in the summary published on Monday.
--With assistance from Joel Rinneby.