According to official figures released on Thursday, Turkey’s annual inflation rate remained stable at around 60% last month, providing the first proof that President Recep Tayyip Erdogan’s economic policy U-turn was successful.
According to the TUIK state statistics office, consumer prices increased by 61.5% in the year that ended in September.
In August, the yearly rate was 58.9%, compared to 47.8% in July.
The month-over-month price increase also decreased, from 9.1 percent in August and 9.5 percent in July to 4.8 percent in September.
The results indicate that Turkey’s inflation rate is beginning to peak following Erdogan’s approval of a string of significant interest rate increases that brought the policy rate from 8.5 percent to 30 percent in only four months.
According to Capital Economics analyst William Jackson, “the small (by Turkey’s recent standards) rise in inflation to 61.5% last month from 58.9% in August provides the first signs that the inflation spike is close to leveling off.”
Erdogan has always believed in the unconventional economic theory that claims that high interest rates really promote inflation rather than just suppress it.
But after surviving a challenging election in May that took place during the worst economic crisis of his two-decade rule, he changed his strategy.
He gave control of Turkey’s economy to a team of technocrats with Wall Street background and broad support from international investors.
Mehmet Simsek, the finance minister, is credited with persuading Erdogan that unless he made significant changes, Turkey would experience a systemic crisis.
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In October of last year, Turkey’s annual inflation rate reached 85%, the highest level since the country started its transition to a fully-fledged market economy in the 1990s.
Statistical anomalies of the so-called “base effect” caused by high levels of inflation starting to appear tiny in comparison to much greater levels recorded 12 months earlier caused the rate to subsequently start to decline.
In June, the annual rate fell to an 18.2-month low of 38.2%.
A number of measures under Simsek’s economic reform led to a brief increase in prices.
To help the central bank replenish its depleted funds, policymakers have allowed the lira to lose 27% of its value against the dollar since the election.
Simsek also increased taxes to help pay for Erdogan’s election campaign promises and did away with a number of onerous rules to increase transparency in economic management.
According to Bartosz Sawicki, an analyst with the Conotoxia investment company, “Turkey’s inflation is being fuelled by a vicious mix of deeply negative real interest rates, substantial wage increases, an overhaul of the tax system, and ongoing lira weakness.”
According to Sawicki, the monthly price increase “is further exacerbated by skyrocketing food prices and skyrocketing oil prices.”
However, Simsek’s strategy sufficiently impressed the Standard & Poor’s rating agency for it to change its long-term outlook for Turkey from negative to stable.
The new team can “rebalance (Turkey’s) economy… toward more balanced external and fiscal accounts, as well as more acceptable levels of inflation,” the agency stated last week. “We believe that by 2026, absent renewed political uncertainty.”
