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Turkish inflation has reached its highest level in more than two years after easing pandemic restrictions last month boosted consumer spending, complicating the central bank’s efforts to meet President Recep’s demand. Tayyip Erdogan to reduce interest rates.
Consumer prices rose 17.5% in June annually, the highest rate since May 2019 and well above the 16.8% forecast by analysts surveyed by Bloomberg. Home furnishings, food and beverage and hospitality boosted the pace of upward price growth, according to official statistics.
Erdogan, who has called himself an “enemy” of interest rates, has renewed his call in recent weeks for the central bank to cut the cost of finance, saying he expects a cut in July or August. He sacked the former central bank governor in March after raising rates by two percentage points; that annoying investors and the pound have since fallen more than 15 percent.
New Governor Sahap Kavcioglu, who shares Erdogan’s unconventional view that high rates lead to inflation, has tried to allay investors ’concerns that they will facilitate monetary policy ahead of time. It has pledged to keep Turkey’s benchmark rate above inflation and has kept it at 19% in the last three rate-setting meetings. The monetary policy committee will meet again next week.
“In an ideal world, with an orthodox central bank that wants to reduce inflation, it would almost certainly raise interest rates. But it is the central bank of Turkey, which is subject to political influence that has a strong influence on policy formulation, ”said Jason Tuvey, emerging economist at Capital Economics.
Erdogan wants lower interest rates to encourage more lending in an effort to stimulate the economy, which expanded 7% year-on-year in the first quarter of 2021.
However, Turkey’s economic recovery from the impact of the pandemic has failed to upset unemployment, which remains high at 14%. Voter discontent with the economy has led to a record decline in support for Erdogan’s ruling party.
“Politically it has a lot of problems, as opinion polls suggest its popularity is declining. It may see the way to drive faster growth and create more jobs. But Turkey is already experiencing one of the fastest recoveries in the world. [coronavirus] crisis, ”Tuvey said.
Turkey’s coronavirus cases have dwindled to about 4,400 a day and lifted a partial blockade and allowed restaurants and other businesses to reopen after speeding up the vaccine launch.
Analysts expect Kavcioglu to cut interest rates in the coming months, as inflation is not expected to cool, in part because the government raised electricity and gas prices this month.
“July [prices] it appears to be even higher, given the energy price hikes announced this past week. All of this makes the central bank’s 12.2% inflation forecast at the end of the year sound very optimistic, ”BlueBay Asset Management strategist Timothy Ash wrote in a note to clients.
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