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Turkish Inflation Cools as Cheaper Oil Outweighs Lira Losses

Oil’s Tug-of-War With Lira Cools Turkish Inflation During Crisis

(Bloomberg) -- Turkish inflation slowed for the first time since October, as oil’s worst quarter on record offset some of the price increases that a depreciating lira would have spurred and economic activity dipped during the coronavirus pandemic.

Consumer prices grew an annual 11.9% in March, down from 12.4% in February, according to data released on Friday.

Already unfazed by inflation as it crept higher for months, Turkish authorities are now busy designing a response to support the economy after transportation seized up and hundreds of thousands of businesses shut down to slow the spread of the virus. Adding to the government’s stimulus package, central bank Governor Murat Uysal cut Turkey’s key interest rate by a full percentage point to 9.75% and announced steps to boost liquidity as well as step up its purchases of sovereign debt.

Turkish Inflation Cools as Cheaper Oil Outweighs Lira Losses

“Inflation will be stuck around the 10% level for some time, as the CBRT really makes no significant effort to fight it,” said Timothy Ash, a strategist at Bluebay Asset Management in London, calling Turkey’s monetary policy authority “not an inflation targeting central bank but an inflation accepting central bank.”

Price pressures indeed show little sign of easing. Core inflation, which strips out the impact of volatile items such as food and energy, jumped in March to an annual 10.5%, the most since August.

While the lira has retreated 11% against the dollar this year, the depreciation lags far behind its emerging-markets peers like the Brazilian real or South Africa’s rand. State banks have continued to prop up Turkey’s currency by selling dollars, amplifying regulatory changes that made it more difficult for investors to short the lira.

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“The outlook for price growth is mixed: lower oil prices should hold it back, while the depreciation in the lira would put upward pressure.”

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Since demand is faltering amid the outbreak, the impact of currency weakness on prices will be more limited, said Garanti BBVA Securities economist Seda Guler, before the data. A gauge of confidence among Turkish manufacturers fell in March by the most since the 2008 global financial crisis.

Turkish Inflation Cools as Cheaper Oil Outweighs Lira Losses

The rout in crude oil has allowed authorities to cut gasoline and diesel prices in March. Annual energy inflation decreased to 9.8% from 15.5% in February. Turkey is a net oil importer.

Uysal, who predicted that price growth will start slowing from the second quarter and drop to single digits from the second half, is almost certain to stick with an easing cycle started after his appointment last July.

A reckoning with inflation as a consequence of expansionary monetary policy may still come “once the contractionary effect of the pandemic on economic activity passes and activity normalizes,” said Nihan Ziya Erdem, chief economist at Garanti BBVA Securities.

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