Turkey central bank. Credit: Adobe Stock
A rally in gold prices is lifting the wealth of Turkish households by billions of dollars, complicating the central bank’s efforts to rein in prices.
Turks’ stock of gold outside the financial system, often called “under mattress gold,” is worth half a trillion dollars, according to central bank estimates. Surging bullion prices have created a wealth effect – where consumers spend more because they feel better off — of more than $100 billion over the past year, Governor Fatih Karahan has said.
Gold reached a record high above $4,000 this week, before paring gains slightly on Friday. According to Is Portfoy calculations, another 10% increase in gold prices would create a wealth effect of about $50 billion.
“Such a large concentration of wealth in gold in Turkey means that the sharp rise in prices could generate positive wealth effects and boost domestic consumption,” wrote Capital Economics senior emerging markets economist Liam Peach. “Stronger demand-side pressures would add to the reasons to expect a slower pace of disinflation.”
Slowing inflation has been challenging for the central bank, mostly because of price increases in items like education and rent. In September, annual price gains accelerated unexpectedly to 33.3% from 33% in the prior month.
Karahan, addressing lawmakers this week, acknowledged that gold is supporting demand through the wealth effect. A study by the Turkish central bank in May found that soaring gold prices helped boost home and car sales in cities where households had prominent savings of the precious metal.
“Inflationary experiences of the past is why Turkey has a high stock of gold,” Karahan said.
The central bank is targeting year-end inflation of 24%, though it estimates that price growth will likely be around 25% to 29%, according to its outlook in August. Markets see price pressures remaining above 30% following September’s surprise acceleration.
(By Beril Akman)