Turkey’s annual inflation surged above expectations in July on the back of food and energy costs, official data showed Tuesday, increasing pressure on the central bank to keep policy tight.

Consumer inflation rose to 18.95%, a fresh two-year high and just below the central bank’s policy interest rate level, the Turkish Statistical Institute (TurkStat) said.

Now at its highest level since April 2019, inflation was up from 17.53% in June after an unexpected dip a month earlier when price hikes were delayed due to a COVID-19 lockdown.

Analysts had expected the June inflation to come in at as much as 18.6%, as predicted in both Reuters and Bloomberg surveys.

Month-on-month, prices increased 1.8% from June, TurkStat said, compared to a Reuters poll forecast of 1.54%, with the monthly rise driven by the food, housing, restaurant and hotel sectors.

The Central Bank of the Republic of Turkey’s (CBRT) key policy rate stands at 19% and the bank has pledged to keep rates above inflation. It last changed the rate in March when former Governor Naci Ağbal raised it to head off inflation, which has risen since last September.

Turkey’s lira rallied as far as 8.2950 against the U.S. dollar after the data – its strongest since June 11. At 8:27 a.m. GMT, it was 0.3% stronger on the day at 8.3255.

Burümcekçi Consulting’s Haluk Burümcekçi said even without a loss in lira value, inflation may rise to 19%-20% in the next three months, with a fall coming only in the final two months to end the year at 17%-18% at best.

If a value-added tax discount due to end in September is not extended, this could exert an upward impact of around 1 percentage point on inflation, he said.

"As a result, because we think the inflation outlook will not allow the central bank to cut interest rates this year, we do not expect a change in rates in August or the following meetings," Burümcekçi noted.

However, if the lira’s recent modest recovery persists, annual inflation could fall with the base effect and hence the possibility of moderate rate cuts being on the table in the fourth quarter could not be completely ruled out, he added.

According to the data, energy prices surged 21.51% from a year earlier, compared with 17.3% in June, amid higher oil prices.

Transportation and furnishings and household equipment prices were up 24.62% and 22.7%, respectively.

A core inflation index showed prices excluding volatile items such as food and energy also rose an annual 17.22%, down from 17.5% during the same period, a sign of strong inflationary pressures underlying the headline figure.

Food prices, which account for roughly a quarter of the consumer basket, rose 24.92%, compared with 20% the previous month.

The highest monthly rise was 5.07% in housing while the lowest rise was observed in alcoholic beverages and tobacco with 0.02%.

Among the main expenditure groups, the highest monthly decrease was in clothing and footwear with 2.13%, the institute added.

The price gains narrowed the gap between the CBRT’s policy rate – the one-week repo rate – and inflation to just five basis points, limiting the monetary authority’s hand to slash borrowing costs.

The bank kept the rate steady last month and raised its year-end inflation forecast to 14.1% last week, as the bank’s governor predicted inflation would fall significantly in the fourth quarter.

The bank also hiked the end-2022 inflation forecast to 7.8% from 7.5% and maintained its 5% projection for 2023.

Annual inflation stood at 17.53% in June and 16.59% in May.

CBRT Governor Şahap Kavcıoğlu last week said consumer prices may follow a volatile course in the summer months but stressed that monetary policy stance was tight enough to prevent these volatilities from being reflected in the main trend.

The producer price index rose 2.46% month-on-month in July for an annual rise of 44.92%, the data showed.

Treasury and Finance Minister Lütfi Elvan had earlier stressed that the gap between producer and consumer prices is "quite disturbing."