Inflation at its peak?

With an official rate of more than 75%, inflation in Türkiye reached a new high for the year. Despite this, the central bank left the key rate unchanged at 50%, but verbally noted that it maintains the option to hike rates further. At the same time, the Turkish central bankers underlined that they expected a significant decline in inflation starting from June, with the rate projected to fall by around one half to around 38% by year-end. Nevertheless, economic data for the current quarter do not show any tangible slowdown in private expenditures. By contrast, the government announced that it intended to trim public expenditures by around 15% to help curb inflation. Financing is only to be provided for projects which are already at least 75% completed, along with measures to overcome the consequences of the severe earthquake last year. It remains to be seen how effective this measure will be, and one can certainly be sceptical in this regard.

Is Erdogan’s governing coalition falling apart?

In the meantime, serious efforts are clearly being made by the president and the largest opposition party, CHP, to find some common ground. Following the landslide victory by CHP in the local-level elections at the end of March, it appears that Erdogan is now more interested in dialogue. In this regard, one interesting development is that in July a court case will begin for a politically-motivated murder, in which high-ranking politicians from MHP, the coalition partner of Erdogan’s AKP, are allegedly involved. All in all, it is possible that Türkiye may be facing a period of higher uncertainty in domestic politics, but this could also quite possibly lead to positive developments.

The equity market in Istanbul advanced another 4.5% in May (about 3.6% in EUR). As a result, the Turkish exchange was one of the best performers among the EM equity markets. Of course, this increase also partially reflects the overall level of inflation. Nonetheless, it is remarkable that the Turkish lira has hardly depreciated at all against EUR and USD since March. There are some indications that a rising number of investors are gaining more confidence in Türkiye’s monetary policy again, after the “unorthodox central bank policy” was ended almost a year ago.