Turkey's annual inflation rate slowed slightly to 61.5% in September, marking the first time in four months that the rate has not accelerated. This provides some early evidence that President Recep Tayyip Erdoğan's economic policy U-turn, which has included a series of interest rate hikes, is starting to work.
The Turkish Statistical Institute (TÜİK) reported on Tuesday that consumer prices rose 4.8% in September from the previous month, down from 9.1% in August and 9.5% in July. The month-on-month slowdown was led by a moderation in food price inflation, which rose 3.3% in September compared to 8.5% in August.
The annual inflation rate, however, remains at a two-decade high. The TÜİK said that the 12-month increase in consumer prices was driven by a 30.3% jump in the cost of education, as well as a 16.8% increase in food prices.
Erdoğan had long been a vocal critic of high interest rates, arguing that they cause inflation rather than cure it. However, he reversed his stance earlier this year after Turkey's inflation rate soared to 85% in October 2022, the highest level since the country began its transition to a market economy in the 1990s.
Since then, the Turkish central bank has raised interest rates by 21.5 percentage points, bringing the policy rate to 30%. This has helped to stabilize the Turkish lira and slow the pace of inflation.
While the September inflation data is encouraging, analysts caution that it is too early to say whether Turkey has turned the corner on inflation. They note that the annual rate is still extremely high and that the economy is vulnerable to external shocks, such as a rise in global oil prices.
"The September inflation data is a positive sign, but it is important to note that the annual rate is still at a two-decade high," said William Jackson, an analyst at Capital Economics. "We expect inflation to remain elevated in the coming months, but we believe that it will start to come down more significantly in 2024."
Policymakers Face Difficult Choices
Turkish policymakers face a difficult balancing act in the coming months. On the one hand, they need to keep interest rates high enough to bring inflation under control. On the other hand, they need to avoid raising rates so high that they choke off economic growth.
The upcoming March municipal elections could also complicate the government's efforts to combat inflation. Erdoğan and his Islamic-rooted party are keen to seize back control of prized cities such as Istanbul and Ankara from the secular opposition.
Some analysts believe that the government may be tempted to slow down the pace of interest rate hikes in the run-up to the elections. However, they warn that this could risk reigniting inflation and prolonging the economic pain for Turkish households.
"Policymakers need to keep interest rates high enough to bring inflation under control, even if this means sacrificing some economic growth in the short term," said Timothy Ash, an emerging markets economist. "Failure to do so could risk a deeper and more prolonged economic crisis in the future."
