Lira on the way down
Inflation in Turkey jumps to almost 60 percent
9/4/2023 11:24 am
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In August, Turkey’s inflation rate rose to 58.94 percent, its highest level since December 2022. The local currency, the lira, reacts immediately and continues to weaken. Continued rapid price increases could mean further hikes in Turkey’s interest rates.
Tax hikes and the devaluation of the local currency, the lira, pushed up inflation in Turkey again in August. According to the statistics office, consumer prices rose by an average of 58.94 percent compared to the same month last year. That was the highest level since December 2022. Economists surveyed had only expected an increase to 55.9 percent after the inflation rate was 47.83 percent in July. From July to August alone, goods and services rose by more than nine percent. Hotels, cafés and restaurants in particular raised their prices sharply during the holiday month.
The lira continued to weaken after the August inflation data was released. The dollar rose to 26.77 lira. The exchange rate of the Turkish currency has thus almost fallen back to the level of 27.20 lira per dollar that the lira had on August 24 before the Turkish central bank raised interest rates very sharply. At the time, the lira had risen to 25.25 per dollar in response to the interest rate hike.
Finance Minister Mehmet Simsek reacted to the development that it would take some time to reduce inflation. “We are patient.” The government in Ankara helped fuel inflation: For example, it raised value-added tax from 18 to 20 percent. Corporate taxes were also increased, as were those on petrol and diesel.
The hoped-for additional income will be used to finance the reconstruction after the devastating earthquake in February. Before the election in May, from which President Recep Tayyip Erdogan emerged victorious, the government had spent more on social assistance than ever before.
Change of course by the central bank should make the lira more attractive
In addition, the slide in the lira fueled inflation, making imports more expensive. The exchange rate has collapsed by around 70 percent against the dollar in the past two years. Due to persistently high inflation and the weakness of the lira, the central bank has now changed course. The key interest rate was raised from 8.5 to 25.0 percent. This should make the currency more attractive for investors again and stop the fall in prices.
However, this could have a negative impact on the economy, which has been doing well up to now. From April to June, the gross domestic product increased by 3.8 percent compared to the same period of the previous year and was therefore stronger than expected. “Growth will slow down in the second half of the year,” said Capital Economics economist William Jackson, given the rise in borrowing costs. For 2023 as a whole, analysts predict an increase of 2.9 percent.