Reuters analysis post-local elections: Turkey to face the painful reality of inflation

Reuters has published an analysis stating that Turkey will face the painful reality of inflation after the elections. The report notes that Turkey is expected to take further policy steps after the local elections to curb stubbornly high inflation, and that the Turkish public, already in a difficult situation due to years of rising prices, will suffer further.

"NOT ENOUGH ON ITS OWN"

The report mentions that households and investors have doubts about whether the Central Bank's U-turn—raising interest rates from 8.5% in June 2023 to 45%—is enough on its own to curb inflation, which exceeded 67% last month. It also notes that Treasury and Finance Minister Mehmet Şimşek has called for patience, stating that the orthodox policies adopted last year will provide relief in prices within this year.

The report stated, "While Şimşek indicated that he is not planning major tax changes, the Central Bank also issued a statement signaling that it would raise interest rates further if inflation remains above forecasts in the coming months. However, the fact that February inflation data came in higher than expected and domestic demand remains high has increased expectations that more fiscal and monetary steps will be taken after the March 31 elections, for which President Tayyip Erdoğan has been running a tight campaign for the ruling AKP."

"WHEN THE LOCAL ELECTION CYCLE ENDS..."

Koç University faculty member and former Central Bank economist Prof. Dr. Selva Demiralp told Reuters, "When the local election cycle ends, monetary and fiscal policies will likely tighten again after a short break. We will taste the full bitterness of the policy medicine until the middle of the year. Inflation will rise at least until then, while the raises made to the minimum wage and other fiscal steps will erode."

The report, which mentions that JPMorgan expects a 500-basis-point interest rate hike from the Central Bank of the Republic of Turkey (CBRT) in April, states that there is a prevailing view that a new minimum wage increase would further damage inflation.

The report also evaluated the Turkish agenda, using the following expressions:

"Following his re-election last May, Erdoğan appointed a new cabinet and central bank management to get things on track amid depleted foreign exchange reserves and rising inflation expectations. Foreign investors began buying Turkish bonds late last year to benefit from interest rate hikes.

However, within the last week, the AKP has set aside Erdoğan's will to fight inflation as it tries to win back Istanbul and other major cities from the opposition in the upcoming elections.

Gizem Öztok Altınsaç, chief economist at Turkey's largest business group TÜSİAD, said that annual inflation will fall after May due to base effects, but will not fall as much as the Central Bank predicts due to strong domestic demand."

INFLATION TO RISE ACCORDING TO POLL

On the other hand, according to a Reuters poll, annual inflation will rise to 42.7% by the end of the year, a level higher than the Central Bank's forecast.