The inflation rate in Turkey jumped in May, official statistics showed Monday, increasing pressure on the central bank to again raise interest rates as fears persist over the strength of the economy. Three weeks ahead of snap presidential and parliamentary elections on June 24, which would give President Recep Tayyip Erdogan beefed up powers, consumer prices climbed 12.15 percent from the same period in May last year, according to the Turkish statistics office. The figure was up sharply on the 10.85 percent reading in April.
Investors have raised concerns that the government is not doing enough to fight inflation amid signs the economy is overheating, with the lira down almost 20 percent for the year to date.
The central bank last month sought to prop up the currency with an emergency 300 basis points rate hike and also by simplifying its monetary policy. The currency slightly gained 0.7 percent in value against the dollar to trade at 4.6 against the greenback. Deputy Prime Minister Mehmet Simsek sought to play down the rise, saying that "to a large extent" it reflected base effects as well as oil price and currency movements. He vowed monetary and fiscal policies would be increasingly coordinated, and that would help inflation trend downwards in the second half of the year.
"With the post-election structural reforms and macro precautionary measures, our set of policy instruments will become stronger," he said. Ratings agency Moody's on Friday said it would again consider downgrading Turkey - already in junk territory - citing concern over economic management and erosion of investor confidence.
Erdogan has repeatedly called for lower interest rates to stimulate growth, a stance analysts say has undermined the independence of the central bank. But last week Simsek and the central bank governor Murat Cetinkaya assured foreign investors in London that the country was committed to fighting inflation and implementing reform. Monday's data also revealed the highest annual increase in transportation costs - up by a fifth since last year.
The central bank is due to hold its next scheduled meeting on Thursday with all eyes on whether it will follow the emergency rate hike with a new move. London-based Capital Economics said the sharp rise in inflation is unlikely to spur another rate hike.
"Despite the sharp rise in Turkish inflation in May ... the rally in lira over the past week or so means that we think that the central bank will decide to stand pat at its MPC meeting," it said in a note.
But Gokce Celik, chief economist at Istanbul-based QNB Finansbank, warned that inflation is set to rise further and the central bank had "enough motives" for a new rate hike at the meeting.
She predicted a modest rise of 50-75 basis points and warned that unchanged rates could hurt the lira. "Now that the word is out there, no action at Thursday's meeting could trigger some depreciation pressures," she said.