The inflation rate in Turkey rose to 75.5% annually last May, exceeding expectations, which represents the peak of the country’s protracted cost of living crisis, according to official data released on Monday.
This significant increase – from slightly less than 70% last April – indicates ongoing economic challenges, according to the agency, despite the government’s reassurances that the worst is over.
Economic indicators and official responses
According to the data, monthly price growth – the central bank’s preferred metric for measuring – also accelerated to 3.4%, exceeding economists’ average expectations.
This rise is in line with the central bank’s recent shift towards more conventional economic policies after President Recep Tayyip Erdogan’s re-election a year ago.
Turkish Treasury and Finance Minister Mehmet Simsek announced – via the X website – shortly after the data was published: “The worst is behind us.”
He expected permanent declines in inflation to begin this June, which could lead to a reduction in the rate “perhaps less than 50%” by the end of the third quarter.
Key numbers to understand the situation
- Food and non-alcoholic beverages: Prices in this category rose 70.1% year-on-year in May, compared to 68.5% in April.
- Core CPI excluding volatile items such as energy and food: Annual core CPI was 75%, down slightly from 75.8% in April.
- Services: Inflation in services remained high, with restaurant and hotel prices rising by more than 5.5% month-on-month.
Manufacturing activity
A measure of Turkish manufacturing activity, compiled by the Istanbul Chamber of Industry and Standard & Poor’s Global, fell below 50, a reading that indicates contraction.
Input costs and product prices rose at much weaker rates in May than in the previous month, indicating signs of easing inflationary pressures.
Monetary policy and market reactions
The central bank maintained official borrowing costs in recent meetings, but took measures to restrict loan growth and remove excess liquidity from the market to ensure constrained financial conditions.
The bank raised its benchmark interest rate to 50% last March after a cumulative tightening of more than 40 percentage points in less than a year.
However, Bloomberg noted that significant deviations from expected inflation expectations could lead to further interest rate hikes.
The agency noted that inflation dynamics call for additional increases in interest rates, and highlighted the risks associated with potential tax increases and further escalation of tensions in the Middle East.
Economist Silva Bahar Baziki suggested – in an interview with the agency – that the central bank may manage these risks through alternative tightening tools instead of increasing borrowing costs.
Investor sentiment
According to Bloomberg, the fiscal adjustments planned by the government, along with monetary tightening, will play a decisive role in shaping inflation trends over the coming months.
Despite the rise in inflation, investor demand for Turkish assets has shown more flexibility.
Last May, lira bonds attracted a record $6.5 billion in foreign capital, and Turkish stocks rose 30% in dollar terms this year, ranking among the best-performing stock markets in the world.
Tufan Gohmert, director of global markets strategy at BBVA in London, confirmed to Bloomberg that more fiscal discipline and continued tight monetary policy could boost interest in local government bonds, provided there is “further improvement in inflation expectations.”
