why inflation is rising 61.14%

99% price increase for transportation in one year, more than 70% for food products and 69% for capital goods. Turkish inflation, which has been in continuous inflation since 2017, is already very high due to the plummeting Turkish lira and rising energy prices and has risen dramatically since the start of the Russian war in Ukraine. In March, it reached 61.14% yoy, up 5.46 points from February. The war in Ukraine is raising fears of further price increases: Turkey is a major importer of Russian and Ukrainian wheat, as well as Russian gas, which will represent 44% of its imports in 2021). Russia and Ukraine are also major suppliers of tourists to Turkey. For example, last year 4.7 million Russian tourists went to Turkey and represented 19% of the foreign visitors.

Lower interest rates

Monetary policy is not helping. On the contrary. For some analysts, this is the main reason for this galloping inflation. In recent months, the Central Bank has lowered its key rate several times. For Timothy Ash, an analyst at BlueAsset Management in London and a recognized specialist in Turkey, it is even the “big cause of inflation”. Interest rates were cut from 19% to 14% between September and December and have been stable since January.

These “unorthodox policies” have fueled inflation, he says, and “the war in Ukraine has only made things worse.” “Let’s not forget that the target is an inflation rate of 5%, which the Central Bank has not been able to meet since 2011,” he remarks.

But, Jason Tuvey of London firm Capital Economics warns, inflation “will likely rise slightly further in the coming months.” Erdogan says they are ready to turn things around and raise interest rates.”

VAT reduction

In an effort to fight purchasing power, President Recep Tayyip Erdogan announced a cut in VAT from 18 to 8% on hygiene products and catering last week. In February, he had already reduced VAT on basic food products from 8 to 1%, but failed to curb the price increases, which partially offset the salary increases granted on January 1.

Despite this rise in inflation, the Turkish lira, which lost 44% of its value against the dollar in 2021, remained stable on Monday morning at 14.7 pounds to one dollar (16.2 to one euro), with the market already anticipating rising inflation.

The lowered note

Less than fifteen months after the next presidential elections, scheduled for June 2023, the head of state on Saturday asked for “patience” from the Turks: realizing that the war in Ukraine was already affecting consumer prices, he explained “to fight against who impose those exorbitant prices” and warned that he will be “ruthless” towards speculators.

“We have to overcome the problems. I ask the nation to be patient and trust us,” he said.

Meanwhile, the financial rating agency S&P Global Ratings has downgraded its Turkish sovereign debt rating and now considers it a highly speculative investment.

The rating of local currency debt has previously been downgraded to “B+” from “BB-” by one step, the agency said overnight from Friday to Saturday, meaning it moves up the S&P ranking of a speculative investment to a highly speculative investment.

The rating of Turkish foreign currency debt was already rated “B+” and is maintained at this level.

“The effects of the military conflict between Russia and Ukraine, including rising food and energy prices, will further weaken Turkey’s already weak balance of payments and exacerbate inflation,” S&P said.

The outlook associated with the ratings remains negative, S&P says, meaning they could be downgraded.

In February, rents exploded in Istanbul by 85% and nationally by 69%, according to calculations by the University of Bahçesehir, far more than salaries, which increased by an average of 30% to 50% on January 1.