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Annual inflation in Turkey skyrockets to 67% in February.

Turkish annual consumer price inflation escalated to 67.07% in February, exceeding expectations, as reported by the Turkish Statistical Institute on Monday. This rise outstripped the 65.7% increase forecasted by Reuters-polled analysts.

The sector encompassing hotels, cafes, and restaurants experienced the sharpest annual inflation surge at 94.78%, with education close behind at 91.84%. The health and transportation sectors also witnessed significant hikes, recording rates of 81.25% and 77.98%, respectively.

February saw a notable jump in the prices of food and non-alcoholic beverages, soaring by 71.12% compared to the same month last year, alongside an unexpected 8.25% monthly increase.

From January to February, Turkey’s inflation rate climbed by 4.53%.

These robust inflation figures are raising alarms about the potential actions of Turkey’s central bank. Despite previous indications of concluding an eight-month rate hiking cycle, the central bank might have to consider further monetary tightening.

In a recent research note, Liam Peach, a senior economist at Capital Economics in London, expressed concern over the higher-than-anticipated inflation rate, especially following a substantial rise in January and strong household spending in the last quarter. He cautioned that persistent core price pressures might necessitate a resumption of the central bank’s tightening measures.

Some experts are forecasting a decline in inflation to around 35% by year-end. However, Capital Economics highlighted that the current data suggests a setback in the disinflation process early this year, with persistent strong inflation pressures.

Turkish Finance Minister Mehmet Simsek, as cited by Reuters, predicted high inflation in the first half of the year, attributing it to base effects and the lagged impact of rate hikes. He anticipated a reduction in the inflation rate over the following 12 months.

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The sustained high inflation rate is partly attributed to the substantial depreciation of the Turkish lira, which hit a record low against the US dollar, trading at 31.43 to the dollar at midday Monday. The lira has depreciated by 40% against the dollar over the past year and 82.6% in the last five years.

Timothy Ash, an emerging markets strategist at BlueBay Asset Management, described the inflation figures as disappointing. He noted the central bank’s efforts to phase out FX-linked deposit accounts and rebuild foreign exchange reserves. This situation has continued to exert downward pressure on the lira, further fueling inflation.

With local elections approaching on March 31, Turkish policymakers are reportedly reluctant to increase rates. However, the unrelenting inflation may compel a rate hike post-election. The key interest rate in Turkey currently stands at 45%, following a cumulative increase of 3,650 basis points since May 2023.

Ash expressed hope for a more favorable situation mid-year due to base period effects, although he acknowledged that further rate hikes might be necessary after the elections.