Turkey’s inflation rate rose to its highest rate to 36.08% by the end of 2021. This is the highest in 19 years.
The rise in the inflation rate was supported by the decline of the lira, and the demand of President Recep Tayyip Erdogan to borrow cheaper.
During December, consumer price inflation rose by 36.08% on an annual basis. This is the highest level since September 2002.
Turkey’s inflation rate rose sharply from 21.31% in November.
Inflation rates exceeded the average estimate of 27.36% in a Bloomberg survey of 19 analysts.
Turkey’s central bank has cut its benchmark interest rate by 500 basis points since September. The move come as part of a series of moves encouraged by Erdogan, who has attacked rising borrowing costs. He considered them as a challenge to businesses and a brake on economic growth.
The cut in interest rates caused the lira to depreciate, which led to higher consumer prices.
The lira regained some of its losses in December after Erdogan introduced a mechanism that promises to compensate lira holders when the currency weakens to a certain level. However, the currency is still about 31% weaker than it was on September 23, when the central bank started cutting interest rates.
The acceleration of inflation and the cut in interest rates by the Turkish Central Bank led to a decline in the real interest rate on the lira to minus 22.08%. This is the lowest real return among emerging markets.
The decision to cut the central bank’s benchmark interest rate by 5% led to a 44% drop in the value of the lira last year. This made it the worst of all the major currencies tracked by Bloomberg.
The currency weakened after the December inflation report, and was trading at a decrease of 2.3% as of 10:30 a.m. local time.
“We expect the headline inflation to accelerate until May-June,” said Ozlem Bayraktar Goksen, Istanbul-based chief economist at Tacirler Yatirim. “We don’t see a change in policy rate in the first quarter in line with the central bank’s guidance.”
Although rising inflation has hurt Erdogan’s popularity ahead of the 2023 elections, he insists on pushing ahead with a policy of interest cuts. He says the policy aims to boost manufacturing, exports and reduce the influence of international markets on Turkish monetary policy.