Annual inflation in Türkiye slowed down further in May, official data showed on Tuesday, coming in below market estimates to touch the lowest level since late 2021.
The Consumer Price Index (CPI) advanced 35.41% year-on-year in May, down from 37.86% in April, according to the data from the Turkish Statistical Institute (TurkStat). The rate came in less than half the level that it reached a year earlier, as tight monetary policy continued to cool prices.
The figure was the lowest Türkiye has seen since November 2021, as the disinflation continued for 12 months uninterrupted.
It was also less than market estimates, which predicted the inflation would slow down to around 36.1%.
Month-on-month, consumer price inflation was 1.53%, the TurkStat said, also below forecasts. In April, inflation stood at 3.0% on a monthly basis.
In a Reuters poll, the monthly inflation rate was expected to be 2.0% in May, with the annual rate seen at 36.1%.
The better-than-expected print boosted bank stocks on hopes that a return to rate cuts could drive the sector. Türkiye's main banking index rose 5.3% on Tuesday midday, while the broader stock index was up 2.5%.
Treasury and Finance Minister Mehmet Şimşek, in a post on social media platform X, said that annual inflation has decreased by 40 points in the last 12 months, falling to 35.4%.
"Goods inflation was 28.7%, the lowest in the last three and a half years. Due to the steady decline in inflation and improvement in expectations, services inflation also decreased by 45 points compared to the previous year, falling to 51.2%. This rate is the lowest level seen since June 2022," Şimşek said.
"As a result of our policies that we implement with determination, along with ongoing disinflation, predictability, financing opportunities and the investment environment will improve, productivity will increase, and with sustainable high growth, welfare increase will be ensured," he added.
"The main purpose of the program that we are implementing with determination is to reduce inflation and ensure stable growth on a healthy basis. Despite the volatility in financial markets in March and April, the disinflation process has continued uninterruptedly for 12 months since June 2024, with the balancing of demand and the improvement in inflation expectations," Vice President Cevdet Yılmaz said in a post on X.
He also said that the monthly rate of increase "slowed down significantly."
At its last meeting, the Turkish central bank reversed its easing cycle and raised the policy rate (the one-week repo auction rate) by 350 basis points to 46% in response to fluctuations in March and the rise of protectionist trade policies. Before the April meeting, the central bank had previously lowered rates as inflation fell.
The bank is set to meet again later this month.
"The larger-than-expected fall in Turkish inflation in May, to 35.4%, will increase the CBRT's (Central Bank of the Republic of Türkiye) confidence that it can restart its easing cycle soon," said Nicholas Farr, emerging Europe economist at London-based Capital Economics research firm.
"While we had thought the easing cycle would resume in Q3 (the third quarter), a rate cut this month is now not out of the question," Farr said.
Although the policy rate currently stands at 46%, the central bank kept the overnight rate at around 49%. The market is closely monitoring the level of overnight rates for further signals on the policy path ahead.
"Real returns are in a better position now compared to when the central bank first started to cut interest rates back in December ... since inflation came better than expected, interest rate cut expectations in the June meeting will increase," said Erol Gürcan, chief economist at Yatırım Finansman.
"We can say that there may be a rate cut at the meeting on June 19 if the overnight interest rates converge to the current policy rate after the Eid holiday. Even if there is no direct easing in June, we expect verbal guidance from the central bank on interest rate cuts," Gürcan added.
Annual increases in May were led by education prices, which were up 71.67% on the year, while housing prices climbed 67.43%. Food and non-alcoholic drinks prices rose 32.87%.
The lowest increases were in clothing and footwear with 14.12%, communications with 19.25%, and transport with 24.59%, according to TurkStat.
The domestic producer price index, meanwhile, rose 2.48% month-on-month in May for an annual rise of 23.13%, the data showed.
"Thanks to the economic program we are implementing and our determined stance on reducing inflation, we aim to reach 20 figures by the end of this year. The decline in energy and commodity prices as a result of global developments supports this goal," Yılmaz said.
Turkish central bank projects inflation to drop to 24% by year-end.
