Turkish inflation soars to three-year high on lira woes

Annual inflation climbed to 21.31 per cent in November, up from 19.89 per cent in October

A women changes Turkish lira to dollars at a currency exchange office in Istanbul. AP

Turkish inflation accelerated for a sixth month in November to the highest level in three years, driven by a slump in the lira that continues to cloud the consumer price outlook.

Annual inflation climbed to 21.31 per cent through last month, up from 19.89 per cent in October. That was faster than the 20.7 per cent median estimate in a Bloomberg survey of 20 analysts. Monthly inflation was 3.51 per cent, compared with the median estimate of 3 per cent in a separate survey.

The lira fell as much as 1.4 per cent after the release, nearing a record low of 13.9519 per US dollar seen earlier this week.

The “lira sell-off only began in mid-November and thus did not completely show through in” Friday’s data, said Ehsan Khoman, head of emerging market research for Europe, Middle East and Africa at MUFG Bank in Dubai. “December’s inflation print will be materially worse.”

It is the first high-profile data point showing that President Recep Tayyip Erdogan’s plan to stabilise prices by lowering interest rates and letting the lira sink is backfiring.

In Mr Erdogan's eyes, the lira’s weakness is the cost of turning Turkey into an industrial powerhouse and freeing the country from a dependence on short-term foreign cash, which flows into the economy when rates are high.

But the currency’s 29 per cent drop during November – the biggest monthly slump since Turkey adopted a floating exchange regime two decades ago – is fuelling prices and unease among voters, producing the exact opposite of what Mr Erdogan is trying to achieve.

The lira dropped as much as 1.3 per cent to 13.8627 per dollar as of 12.48pm in Istanbul, nearing the record low it recorded last week.

Energy prices rose an annual 32.14 per cent in November from 25.76 per cent the previous month, although Turkey continues to subsidise natural gas and oil products to reduce the financial burden of increasing costs on end users.

A global commodity boom also contributed to producer prices, where inflation reached 54.6 per cent, the highest reading since April 2002, according to data compiled by Bloomberg.

Annual price gains in food, which makes up about a quarter of the consumer basket, slowed to 27.11 per cent from 27.41 per cent, but is still well above the end-2021 official estimate of 23.4 per cent.

The acceleration takes Turkey’s benchmark interest rate adjusted for inflation to negative 6.3 per cent, one of the lowest real yields among emerging markets.

Fitch Ratings cited the direction of monetary policy and a lack of consistent forward guidance as it downgraded the outlook on Turkey’s credit rating from stable to negative.

The central bank’s “premature” easing cycle and the prospect of further monetary and fiscal stimulus ahead of the general elections scheduled for 2023 “create risks to macroeconomic and financial stability and could potentially re-ignite external financing pressures”, Fitch said on Thursday.