Turkey's Inflation Approaches 70%

Inflation in Turkey rose for the fifth month in a row, approaching 70% despite the significant increase in interest rates.

Inflation rate reached 68.5% in March from 67.1% in February. This compares to a consensus forecast of 69.1% of analysts polled by Bloomberg.

Turkish citizens increased their holdings of foreign currency under pressure from fears that the lira would fall sharply after the municipal elections held on March 31, the result of which represented a defeat for President Recep Tayyip Erdogan. 

The lira fell by about 7% in one day after the presidential elections held last May, and the concern was that a similar decline would occur again.

The Turkish lira was the worst performer among emerging market currencies last month, falling 3.2% against the US dollar.

Turkey has become vulnerable to political fluctuations after the elections, but this time Erdogan ruled out the possibility of retreating from traditional measures, and reiterated support for his political team despite the defeat. This most likely indicates continued rise in borrowing costs and tightening of fiscal policies to control inflation.

Central Bank Governor Fatih Karahan informed the Banking Association on Monday that monetary policy tightening continues, despite the rise in the lira's exchange rate against the dollar. While banks such as Goldman Sachs and Deutsche Bank expected an improvement in the currency’s performance.

While inflation data in February was worse than expected, and the lira was subjected to a wave of heavy selling, the Turkish Central Bank surprised the markets by raising interest rates by 500 basis points last month, raising the base interest rate to 50%, recording its highest levels in decades.

In the minutes of the most recent monetary policy meetings, the Central Bank drew attention to the rise in rent inflation and the continued rise in service and food prices, in conjunction with a significant increase in the minimum wage at the beginning of this year.