Economy in Turkey: Interest-Inflation Gap Widens Again

In April, Turkey’s monthly inflation came in at 3%, with annual inflation slightly easing to 37.86% from March’s 38.1%. While headline inflation was slightly below expectations, core inflation indicators showed stronger increases. The Central Bank of Turkey (CBRT) raised its policy rate to 46% during its April Monetary Policy Committee meeting, putting the rate 8.14 points above annual inflation.

The average weighted cost of funding rose further to 48.82%, pushing the interest-inflation gap to 10.96 points.

Tight Monetary Policy Amid Confidence Loss

Following the political operation targeting Istanbul Mayor Ekrem İmamoğlu on March 19, financial uncertainty and a loss of market confidence prompted the CBRT to adopt a much tighter stance than inflation alone would suggest. Experts say this policy aims not only at curbing inflation but also at protecting reserves and controlling foreign exchange demand. Before the political event, the gap between policy rate and inflation was much narrower.

April Inflation Details

• Goods and services inflation accelerated: goods rose by 2.99% and services by 3%.
• Food and beverages saw a 2% increase. While prices of fresh fruits and vegetables dropped, overall food prices remained relatively flat.
• Electricity price hikes drove a 4.66% rise in the housing group, contributing the most to headline inflation. Electricity prices rose 20.8% monthly, with annual inflation reaching 83.28%.
• Transportation inflation rose by 3.8%, driven by currency effects and increased price caps, despite lower oil prices. Airfare surged by 42.1%.
• Clothing and footwear increased by 6.5% due to seasonal changes.
• Restaurants and hotels saw a 3.59% monthly rise, adding 0.3 points to headline inflation.
• Miscellaneous goods and services, influenced by rising gold prices, rose 2.65%.

May Outlook and Beyond

Fresh fruit and vegetable prices are expected to fall in May due to seasonal effects, but frost damage may impact food inflation in coming months. The CBRT will release its second Inflation Report of the year on May 22, where revised year-end projections and remarks from Governor Fatih Karahan will be closely watched. Markets anticipate the first interest rate cut in July, possibly by 300 basis points, while no change is expected at the June MPC meeting.

Source: A summary from article by Şebnem Turhan on ekonomim.com