A cashier counts out Turkish lira banknotes on the counter of a foreign currency exchange store in Istanbul, Turkey. (Photographer: Nicole Tung/Bloomberg)

Turkish Inflation Surprise Not Enough to Free Central Bank Hands

(Bloomberg) -- The unexpected slowing of Turkish inflation last month is hardly the green light the central bank is watching for to begin unwinding its crisis-fighting monetary policy.

Consumer prices rose 19.5 percent in April from a year earlier, compared with an increase of 19.7 percent in March, as weak domestic demand likely offset record gains in food costs, data showed on Friday. The median estimate in a Bloomberg survey of 18 economists was for an increase of 20.4 percent. The lira was little changed.

The numbers will be welcomed by central bank Governor Murat Cetinkaya, who earlier this week said improving price dynamics and an extended slowdown in the economy would outweigh rising energy and food prices later in the year. Yet a headline figure hovering around four times the official target of five percent, and a currency under pressure, hardly make the case for cheaper borrowing.

“Unless sentiment toward the lira improves markedly, the central bank will not be able to lower rates,” said Piotr Matys, a London-based analyst at Rabobank. “A premature cut when the market is not ready for it would be counterproductive as it would reignite the selling pressure on the Turkish currency.”

Turkish Inflation Surprise Not Enough to Free Central Bank Hands

Earlier this year, Cetinkaya pledged to wait for a “convincing” inflation slowdown before cutting rates, but he has been stymied by a weaker lira. Food costs remain stuck at their highest level in at least 15 years despite a government campaign targeting what it says is profiteering and deep discounts.

Turkish Inflation Surprise Not Enough to Free Central Bank Hands

The lira was little changed after the data, trading 0.2 percent weaker at 5.9761 versus the dollar at 2:20 p.m. in Istanbul. The currency has lost more than 11 percent this year, and is the worst performer behind the Argentine peso among 21 major currencies tracked by Bloomberg.

April Headline InflationGovt Year-End EstimateCentral Bank Year-End EstimateSurvey of Expectations Year-End
19.5%15.9%14.6%16.2%

Inflation developments show that “we will meet our targets especially with the upcoming retreat in food in summer months,” Treasury and Finance Minister said in a tweet. The government’s year-end inflation estimate is 15.9 percent, while the central bank’s prediction for the end of 2019 is at 14.6 percent.

What Bloomberg’s Economists Say:

“Inflation may not have risen as we expected, but it’s still not falling at a convincing rate. As a result, the central bank will probably have to delay its interest-rate-cut cycle at least until the second half of the year if it wants to hit its year-end inflation forecast of 14.6% and avoid a further destabilization of the currency.”
-- Ziad Daoud, economist
Click here to view the research

Food inflation accelerated to 31.9 percent from 29.8 percent in March, the highest since at least 2004, staying well above the central bank’s year-end forecast of 16 percent.

This was, however, more than offset by a broad-based slowdown in prices from textiles to housing and transportation. A core index that strips out volatile items such as gold, food and energy dropped to 16.3 percent from 17.5 percent, showing a marked improvement in underlying price dynamics. Producer prices rose an annual 30.1 percent, compared with a gain of 29.6 percent in March.

©2019 Bloomberg L.P.