Turkey’s inflation rate continues to fall, standing at 39.6 percent in May and below 40 percent for the first time since the beginning of last year. The Turkish Statistical Office said in a report today. Housing is getting cheaper, while the rise in food and beverage prices has virtually stopped. However, the Turkish lira is weakening further, which has not been helped by the election of a respected economist as finance minister in the new government.
The highest in a quarter of a century
On a month-on-month basis, prices rose by 0.04 per cent after rising by 2.39 per cent in the previous month. Analysts had expected prices to fall month-on-month, by 0.2 percent, Reuters reported. They had expected year-on-year inflation to fall to 39.2 percent. Inflation in Turkey topped 85 percent last autumn and was the highest in nearly a quarter of a century.
In the foreign exchange market, the Turkish lira continued to fall last week, falling to an all-time low of 21.8 lira against the dollar. The market was counting on the election of new Finance Minister Mehmet Şimşek to help stabilise the exchange rate, but this has not yet happened. Şimşek is an economist who is respected abroad and among investors. Nevertheless, the lira broke away from its lows against the dollar at the end of last week and strengthened slightly.
Fifty-six-year-old Şimşek gained the confidence of financial markets during his tenure as finance minister and deputy prime minister from 2009 to 2018. On Sunday, he said the country had no choice but to start acting rationally again.
The appointment of Mehmet Şimşek as finance minister is seen as a signal that the newly elected government of President Recep Tayyip Erdoğan is moving away from the interest rate cuts that Turkey has been using to fight high inflation at Erdoğan’s behest, even though traditional economic theory recommends raising rates in a similar situation. It was the unconventional approach to fighting inflation that economists say was the main reason for the lira’s fall.
“There is hope that (Şimşek) could bring much-needed order to the economy and work more effectively with the market,” said Mohammed Elmi, a portfolio manager in charge of fixed-income investments in emerging markets at Federated Hermes.