(Bloomberg) -- Turkey’s annual inflation swung to a 15-month high with a faster pickup than forecast, an acceleration closely watched by a central bank that’s still on alert after ending interest-rate hikes.

Stoked in part by this year’s sharp increase in the minimum wage, price growth in February quickened for a fourth straight month to 67.1% from 64.9% in January. The median estimate in a Bloomberg poll of economists was 66%.

Monthly inflation — a gauge that’s been under particular scrutiny by the central bank — also exceeded forecasts even as it eased back to 4.5% from 6.7% in January. It remains well above its level in the fourth quarter.

Policymakers expect annual inflation to peak above 70% in May but left interest rates unchanged last month, after delivering a cumulative 3,650 basis points of tightening in eight steps. With the central bank adopting a wait-and-see approach for now, the deteriorating outlook means official borrowing costs remain deep below zero when adjusted for current prices.

“One could argue that with such deeply negative real interest rates, monetary policy is not sufficiently tight to bring inflation in line with the official 5% target and to anchor inflation expectation,” said Piotr Matys, senior currency analyst at InTouch Capital Markets, who called Turkey’s inflation level “staggeringly high.”

The figures were the final reading before local elections later in March, a ballot in which President Recep Tayyip Erdogan’s ruling party will try to win back opposition-held cities such as Istanbul and Ankara. Looser fiscal policy ahead of the vote has emerged as an obstacle to efforts by the central bank to contain inflation.

“We are far away from price stability, but that’s our goal” Turkey’s Treasury and Finance Minister Mehmet Simsek said in a TV interview with Bloomberg HT before the data release. “Monthly inflation will be back on trend as of March” he said.

What Bloomberg Economics Says...

The upside surprise in Turkey’s inflation will not see the central bank hike rates further – just yet. With gains exceeding 70% in store ahead, we expect policy rates to remain on hold at 45% through the third quarter of the year and additional tightening to be delivered via alternative tools in the meantime.

— Selva Bahar Baziki, economist. Click here to read more. 

Newly installed Governor Fatih Karahan, who took over the central bank after a surprise leadership change in early February, has called the minimum wage increase the biggest risk to Turkey’s inflation outlook. The minutes of the last policy meeting also singled out the “strong increase in unprocessed food prices” as a major driver of price growth. 

Sticky inflation in the services industry has been another area of concern, a reflection of domestic demand that’s been slow to cool off despite much tighter monetary policy. 

Growth in services prices, such as rental and school costs, surged to an annual 94.4% in February from 89.7% in January. Faster inflation in the sector largely explains why overall figures came in well above expectations, according to QNB Finansbank chief economist Erkin Isik. 

“Bearing in mind the increase in end-year inflation expectations, which will move higher after this data, the central bank is more likely to hike rates further in the second quarter,” he said.

--With assistance from Joel Rinneby.

(Updates with analyst comment in final two paragraphs.)

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