World's Highest Real Rate Ripe for Cuts After Turkey Price Letup
Even as the central bank laid the groundwork for looser policy at its last two meetings, it’s kept borrowing costs on hold.
(Bloomberg) -- A slowdown in Turkish inflation has been so steep that the central bank could have a decision to make this month about easing monetary policy after a pause since September.
A moderation in food and energy costs, alongside the effect of a high base of comparison, are propelling the deceleration that began three months ago, helped by weak demand and elevated interest rates. Data on Wednesday showed inflation cooled more than forecast to the slowest in a year, reaching an annual 15.7%.
Read more: Turkey’s Real Rate Now Towers Over Peers
Even as the central bank laid the groundwork for looser policy at its last two meetings, it’s kept borrowing costs on hold since increasing its key rate by 625 basis points in September after a currency rout. With inflation down almost 5 percentage points so far this year, Turkey now boasts a real rate of 8.3%, the highest among more than 50 major economies tracked by Bloomberg.
Now that Istanbul’s contentious elections are out of the way, the strength of disinflationary momentum could clinch a cut in interest rates when the central bank meets in just over three weeks. Gains in the lira, the world’s best performer since the start of May, will probably reinforce the confidence among policy makers that the time is right to resume easing.
“The June CPI print helps pave the way for the central bank to kickstart its easing cycle on July 25 with a 100 basis-point cut,” Carla Slim, an economist for Standard Chartered Plc in Dubai, said in a report.
Economists brought forward their expectations for rate cuts and predict the first move already this quarter, according to forecasts compiled by Bloomberg. The lira traded 0.3% stronger at 5.6429 against the dollar as of 3:55 p.m. in Istanbul.
The surprising pace of the deceleration reflects “the weakness in domestic demand and the central bank’s tight policy, despite the volatile course of the exchange rate and still high services inflation,” said Muhammet Mercan, chief economist at ING Bank AS.
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“A rate-cutting cycle is likely to begin later this month. High real interest rates, weak economic growth, stable lira and the end of a multi-year busy electoral cycle all pave the way for easing.” --Ziad Daoud, Mideast economist Click here to view the piece. |
More than two-thirds of the decline in June’s annual inflation can be attributed to slower increases in food costs, which grew at the weakest monthly pace since August 2016. Food and non-alcoholic beverages make up nearly one quarter of Turkstat’s inflation basket. Gains in energy prices decelerated by more than 2 percentage points to 10.5% last month.
“We see the spillover from lira weakness on inflation is fizzling out,” said Okan Ertem, senior economist at Turk Ekonomi Bankasi who had the most accurate forecast of June prices. “Our year-end inflation estimate is 16%, but if the lira remains strong we may revise down our estimates.”
--With assistance from Harumi Ichikura, Sarina Yoo, Abeer Abu Omar and Constantine Courcoulas.
To contact the reporter on this story: Cagan Koc in Istanbul at ckoc2@bloomberg.net
To contact the editors responsible for this story: Onur Ant at oant@bloomberg.net, Paul Abelsky, Mark Williams
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