Turkey: Inflation to stabilize as lira finds its level

By Andrew Jay Rosenbaum

ANKARA

Although the Turkish inflation rate was higher in December, analysts expect it to stabilize in the near future as the drivers of inflation are weakening.

“We expect inflation to stabilize in the coming months,” forecast Christopher Dembik, an economist with Saxo Bank in Paris.

While annual inflation rose to 8.81 percent in December from 8.1 percent in November, according to a report from the Turkish Statistical Institute on Jan. 4, a number of the major drivers of this inflation were temporary, analysts said.

The Turkish government says it is taking action to stabilize inflation. Deputy Prime Minister Mehmet Simsek pledged to “maintain solid steps in the fight against the rising inflation rate in 2016,” in an interview with Turkish broadcaster NTV on Jan. 4.

One of the challenges Simsek noted is the fall of the Turkish lira against the dollar, which on Wednesday reached above 3 to the U.S. currency, from about 2.96 on Monday.

While a lower-valued lira fuels inflation, the Turkish currency has been expected to fall somewhat as pressure on emerging-market currencies rises in the wake of the Federal Reserve’s interest rate increase on Dec. 16.

As Goldman Sachs analysts pointed out in a note released on Jan. 4, policymakers in many emerging markets are working to find a compromise between supporting growth and keeping inflation in check.

“2016 should be another year with low inflation rates,” analysts at the investment bank said.

In Turkey, inflation may be expected to stabilize in a range between eight to nine percent, according to a number of analysts.

“Inflation is partly being driven by temporary factors,” commented Attila Yesilada, an economist with Global Source Partners in Istanbul.

“Price increases for electricity and gas, along with tax hikes on alcohol, cigarettes and mobile phones are all temporary factors that are pushing inflation higher at the beginning of the new year. And the minimum wage increase put through by the government in December will also contribute to higher inflation in the near term,” he explained.

However, once these temporary factors fall into place, inflation should stabilize if there is no unexpected action by the Federal Reserve to raise U.S. rates, Yesilada said.

The Fed has committed to four interest rate hikes this year, but traders actually expect only two.

In the medium to long term, structural reforms planned by the new government are expected to help Turkish economic growth, Dembik noted.

Simsek said the government would realize the required reforms in the next couple of months.

“In this manner, Turkey could differentiate itself from other countries in a positive manner,” he said.

“Turkey succeeded in growing above the global average in 2015. We maintained our budget discipline, but allocated some gap areas for the sake of investments as Turkey needs to lure more investments."

"We’ll continue to preserve our fiscal discipline approach this year as well,” the minister added.