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Turkey’s inflation rate pushed higher in May amid a drop in the country’s currency and a jump in oil prices, according to a critical report that piles further pressure on the central bank to raise interest rates this week after an emergency hike in May.

Consumer prices climbed 12.15 per cent in May from the same month in 2017, according to official data from the Turkish Statistical Institute. It marked a pick-up from the 10.85 per cent that was recorded in April.

Transportation costs experienced the highest annual increase, up by a fifth from 2017. Home furnishings prices rose more than 16 per cent, while prices at hotels, cafés and restaurants increased 12.51 per cent. Housing costs were up 11.2 per cent.

A separate report showed domestic producer prices rose at an annual clip of 20.16 per cent, from 16.37 per cent the previous month. A jolt higher in oil prices in May is thought to have influenced the prices paid at the wholesale level.

The lira strengthened after Monday’s data release, recently up 0.88 per cent on the day at TL4.6094 to the dollar. It traded as weak as TL4.9221 last month.

“The market interpreting this number as so bad, it is actually good,” said Timothy Ash, senior emerging market sovereign strategist at BlueBay Asset Management. He said it would give Turkey’s central bank “very little wiggle room” not to increase rates at this week’s meeting, scheduled for Thursday.

High inflation, stoked by vigorous economic growth and fiscal expansion, has been one main reason cited by analysts for the weakness in recent months in the lira, which is down almost 20 per cent for the year to date. Investors are concerned that the lira weakness will stoke further inflation, which could, in turn, place more pressure on the lira.

Sentiment has stabilised somewhat since the central bank governor and deputy prime minister met with investors last week to assure them action would be taken to place downward pressure on inflation. However, investors have remained uncertain given President Recep Tayyip Erdogan’s persistent dislike of high interest rates.

Policymakers hiked one of the country’s main rates by 3 percentage points last month in an emergency move aimed at stabilising the lira.

The central bank has also simplified its monetary policy regime in another move aimed at proving to foreign investors that it will undertake more orthodox economic measures.

Clemens Grafe, economist at Goldman Sachs, said last week that an upward surprise to its estimate of May consumer inflation of 11.7 per cent may cause the lira to weaken further and “markets could start pricing in a hike.”

“We think that, in that case, the [central bank] would likely respond to such developments to avoid another bout of lira weakness in the run-up to the elections,” he said.

Mr Ash added: “This is no longer about rates, but the very credibility of the [Turkish central bank] and monetary policy more generally in Turkey after the incredibly damaging comments by Erdogan in London earlier last month”.

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