Turkish Rate Hikes Less Likely After Price Letup Amid Risks
Turkish inflation surprised with a bigger slowdown than anticipated, heading off the prospect of rates rising any time soon.
(Bloomberg) --
Turkish inflation surprised with a bigger slowdown than anticipated, heading off the prospect of interest rates rising any time soon despite the threat that a new round of currency depreciation may set off more price pressures.
Price growth slowed in July for the first time in three months as the economy emerged from coronavirus restrictions, helped in part by the effect of last year’s high base of comparison. Inflation edged down to an annual 11.8% from 12.6% in June, according to data published on Tuesday, below every forecast in a Bloomberg survey of 15 economists.
Facing a less favorable outlook, the central bank has responded by leaving rates on hold for two months, with Governor Murat Uysal saying last week that it could review the liquidity measures taken to support the economy during the global pandemic. While policy makers also raised their year-end projection for inflation to 8.9%, it’s still more upbeat than any of the forecasts compiled by Bloomberg.
In the view of analysts from Goldman Sachs Group Inc. and Oxford Economics, rate increases may be warranted soon. When factoring in inflation, Turkey’s official borrowing costs are among the lowest in the world and have been below zero throughout the year.
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The central bank may opt to tighten liquidity instead of raising rates, according to Haluk Burumcekci, the founder of Istanbul-based independent research firm Burumcekci Research and Consulting
If inflation expectations continue to rise and pressure on the lira persists, policy makers may initially increase the weighted average cost of funding to the banking system, Burumcekci said. “Additionally, it may take macro prudential tightening steps toward consumer loans,” he said in a report.
Any increase to borrowing costs would likely draw stiff opposition from President Recep Tayyip Erdogan, who advocates an unorthodox theory that high rates cause rather than curb inflation. He fired Uysal’s predecessor a year ago for not easing policy.
The latest bout of currency weakness could hamper efforts to keep inflation in check by making imported goods more expensive. The lira weakened almost 2% against the dollar last week after staying within a tight trading range since June. It’s also near a record low against the euro.
Currency Fallout
State banks have been flooding the market with dollars and authorities have restricted the ability of foreign investors to trade the currency. But the side effects of an attempt to curtail inflation by controlling Turkey’s currency are becoming more pronounced.
The lira’s overnight forward-implied yield jumped as much as 1,020 percentage points to 1,050% on Tuesday, the highest level since March 2019. The move followed dollar sales by state banks last week, which began to settle after a public holiday and drained the supply of local currency.
Turkey is among emerging economies where the exchange rate is “overvalued,” according to the Institute of International Finance.
‘Dirty Float’
“Turkey is a dirty float with heavy intervention to prevent depreciation in the recent past,” the IIF’s deputy chief, economist, Sergi Lanau, and economist Jonathan Fortun said in a report.
Pumped up by monetary stimulus, Turkey’s economy may also complicate an attempt to keep disinflation on track with the easing of restrictions imposed to stop the coronavirus.
A measure of Turkish manufacturing in July rose to the highest in more than nine years, survey data from the Istanbul Chamber of Industry and IHS Markit showed on Tuesday.
Input costs “continued to rise sharply, albeit at a slower pace than in the previous month,” while the rate of output price inflation accelerated to the fastest since March, according to their report. “Improving demand enabled firms to pass on higher input costs to customers,” it said.
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