Consequences of the war in Ukraine: Turkish inflation at 61 percent

Status: 04/04/2022 10:58 am

Turkish consumer prices increased more in March than in 20 years. The war in Ukraine, rising energy costs, and the devaluation of the lira resulted in an inflation rate of 61 percent.

Inflation in Turkey rose to more than 60 percent in March. Consumer prices rose 61.14 percent in March compared to the same month last year, according to the Ankara National Bureau of Statistics. In the monthly comparison, consumer prices increased 5.46 percent. In February, the increase was about 54 percent.

Inflation is particularly high in transport (around 100 percent year-on-year), but food prices also continued to rise. According to the statistics authority, producer prices even increased by around 115 percent year on year in March.

The aftermath of the Ukrainian war

Economists assume that the inflation rate will remain above 50 percent by the end of the year. In a current country study, experts from the S&P rating agency say the fallout from the Ukraine war, including rising food costs and rising energy prices, will further weaken the economy. Turkey and will exacerbate inflation. Therefore, experts lowered Turkey’s credit rating. The outlook for the next twelve months is negative.

Russia and Ukraine are important suppliers of cereals and sunflower oil. Cooking oil in particular had recently become much more expensive in Turkey. In April VAT was reduced on some products such as hygiene items. The Turkish tourism industry is also feeling the effects, as many Russian tourists regularly visit the country.

Turkey’s central bank cuts interest rates

The main reason for the sharp rise in consumer prices is the loose stance of Turkish monetary policy. Despite high inflation, the Turkish central bank cut the key interest rate several times last year, most recently to 14.0 percent. President Recep Tayyip Erdogan is an outspoken opponent of high interest rates, which economists recommend as a remedy for high inflation. Higher interest rates would also make your own currency more attractive.

Turkey’s central bank is actually targeting an inflation rate of five percent, but according to its own forecast it will still be well below this target next year: the increase should then average 8.2 percent. Inflation has been in double digits for most of the last five years, eating into Turkish income and savings.

Furthermore, the Turkish lira has lost about half of its value against the dollar over the past year, which in turn is fueling inflation. This is because the country, which is poor in raw materials, imports more goods than it exports. Imports are often settled in dollars and other currencies.

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