The lira is likely to depreciate sharply after the local elections, and Turkey's inflation rate is expected to soar to nearly 70% in March

The Zhitong Finance App learned that Turkey's inflation rate may soar to nearly 70% in March due to market concerns that Sunday's local elections may cause the Turkish lira to depreciate.

According to a survey, analysts expect data released on Wednesday to show that prices rose to 69% year on year in March, up from 67.1% in February. Another survey showed that the main indicator used by policymakers is likely to fall from 4.5% to 3.5%, which is still higher than the previous quarter.

As a result of the March 31 municipal elections, President Recep Tayyip Erdogan suffered an unprecedented defeat. Fearing that the Turkish lira would face a sharp depreciation, the country's citizens increased their holdings of hard currency. After the presidential election in May last year, the Turkish lira fell by as much as 7% in a single day, and the market feared that a similar sharp decline would be repeated.

Last month, the Turkish currency had the worst performance among emerging market currencies, falling 3.2% against the US dollar.

Turkey is generally prone to policy swings after elections. However, Erdogan this time ruled out concerns about the regression of orthodox measures and reaffirmed his support for his economic team, despite his failure. This is likely to indicate that Turkey will continue to raise borrowing costs and tighten fiscal policy to curb inflation.

Turkish Central Bank Governor Callahan told the Banking Association on Monday that he would maintain an austerity policy, which caused the Turkish lira to soar against the US dollar. Institutions such as Goldman Sachs and Deutsche Bank expect the Turkish lira's performance to improve.

Selva Bahar Baziki, an economist at Bloomberg Economics, said: “The pace of price increases is likely to accelerate and reach a peak of 73% in May. What will follow will be a lengthy process of slowing down, with inflation reaching 43% by the end of the year, partly due to favorable base effects. Inflation risks tend to rise, mainly because after local voting on March 31, the government's tax and fee plans may be revised, the Turkish lira depreciation will accelerate, or the Middle East war will escalate.”

With inflation falling short of expectations in February and the Turkish lira vulnerable to sell-offs, the Turkish central bank unexpectedly raised interest rates by 500 basis points last month, raising the benchmark interest rate to 50%, the highest level in decades. In the minutes of a recent policy meeting, the Turkish central bank drew attention to rising rent inflation, rising service and food prices, and a sharp rise in the minimum wage at the beginning of the year.

Deutsche Bank analysts Yigit Onay and Christian Wietoska said, “Fiscal policy will play a key role in dealing with inflationary pressures and promoting economic rebalancing.”

“Potential adjustments in management prices, such as household electricity and gas prices, fiscal consolidation measures, and income policies, will have a significant impact on the path of inflation,” they said. They expect the inflation rate to hover around 45% at the end of the year; in contrast, the Turkish central bank expects the inflation rate to reach 36% this year.