Turkish Markets Catch a Break on Slower-Than-Forecast Inflation

(Bloomberg) -- Turkey’s lira and government bonds pared their declines as slower-than-expected inflation offered some relief to markets hit by U.S. sanctions.

The currency rebounded from a record low against the dollar and bond yields fell after data showed consumer prices rose an annual 15.9 percent in July, slower than all 15 economist estimates in a Bloomberg survey. The U.S. sanctioned two Turkish government ministers on Wednesday, a move that sent markets tumbling and sets into motion a diplomatic showdown that could eventually see Washington levy economic penalties.

Turkish Markets Catch a Break on Slower-Than-Forecast Inflation

Still, Friday’s inflation data is unlikely to offer too much comfort to investors. A fourth month of rising consumer prices has eroded the real policy rate to less than 2 percent, leaving Turkish assets exposed to capital outflows given the economy’s large external financing needs. Investor concerns have pushed the lira down by more than 25 percent this year, threatening to filter through into even higher prices.

The inflation reading “is not going to let the central bank off the hook. The pressure is still on,” said Timothy Ash, a strategist at BlueBay Asset Management in London. The central bank and Treasury and Finance Minister Berat Albayrak “need to wake up and quickly to roll out some credible policy responses.”

The lira climbed as much as 0.1 percent after earlier touching an all-time low of 5.1146 per dollar. The currency was down 0.1 percent at 5.0719 per greenback as of 3:57 p.m. Istanbul time. The yield on 10-year government bonds was unchanged at 19.04 percent after earlier jumping 30 basis points.

Morgan Stanley has said announced price hikes of natural gas, electricity and bread, effective from August, will add around 0.7 percentage points to headline inflation next month.

“Coupled with the ongoing depreciation in the lira, it is not possible to say inflation has peaked, despite the ongoing slowdown in domestic economic demand,” said Ercan Erguzel, an economist at the U.S. bank in Istanbul.

The central bank is scheduled to next meet on Sept. 13. Policy makers unexpectedly left rates on hold last week, saying the economy was slowing, and it wanted to see the impact of 500 basis points of hikes since April. But many investors worry that it acted too late and that it is coming under pressure from President Recep Tayyip Erdogan not to raise borrowing costs further.

The inflation data show central bank was right in its decision not to raise interest rates on July 24, Albayrak said in an interview with NTV in Ankara.

“Decisive action by the central bank is the only way out of this dilemma,” Commzerbank AG analysts, including Ulrich Leuchtmann, wrote in a note before the inflation release. “However, the bank obviously does not have the courage to stand up to politicians and pursue a more restrictive policy.”

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