More rate cuts expected as Turkish inflation eases more than expected in August

By bne IntelliNews September 5, 2016

Consumer prices in Turkey increased 8.05% y/y in August, easing from 8.79% a month earlier, statistics office TUIK said on September 5.

The reading was below market expectations for a hike of 8.4%. The sharper-than-expected fall in inflation will likely to be used as justification by the central bank for further rate cuts, analysts suggest. The central bank, CBRT, has been under pressure from politicians to cut its rates to boost domestics demand and economic activity despite inflation staying well below the mid-term target of 5%.

On a monthly basis, prices declined by 0.29% m/m, above the market consensus of 0.15% growth. 

Food prices, declined by 1.92% m/m in August, shaving 0.4 percentage points (pp) off the headline index. The decline followed a 3.15% m/m increase in July. At the same time, clothing prices were down 4.69% m/m shaving another 0.3pp of the headline index. The 3.44% m/m increase in tobacco product prices limited a further decline in the headline inflation, adding 0.15pp.

The central bank’s favourite core inflation indicator, the so-called I-index, fell by 0.02% m/m in August after rising 0.13% m/m in the previous month. The annual core inflation, thus, slowed to 8.41% from 8.7%. The central bank’s inflation forecast for this year is 7.5%.

Domestic producer prices edged up 0.08% m/m, bringing the annual increase down to 3.03% in August from July's 3.96%, TUIK data also showed.

Good numbers, but due to the usual volatility driven by unprocessed food prices, Tim Ash at Nomura said, commenting on the August inflation figures. “In the short term the economy is slowing – as indicated by PMIs and confidence indicators, and we might see this in IP data for August, and Q2 national accounts data due this week,” according to Ash.

“This could help the CBRT build the narrative for further continuing its current rate cutting agenda, but the bank likely needs to be warned that the global environment could still so easily turn negative in October/November around the Fed/US elections, and a Moody's decision still looming.”

Most investors would still prefer a much more cautious line from the CBRT as it moves to “normalise”, according to Ash. “Maybe this data will let the CBRT move more quickly to now unify its policy rates around the average funding rate at around 8%, further cutting the overnight lending rate from 8.5%,” he said.

Analysts at Capital Economics also suggest that the better-than-expected CPI reading in August will be used by policymakers as a justification to lower interest rates further. “For now, we have pencilled in two additional 25bp cuts in the overnight lending rate at the next two Council meetings, which would bring it to 8.0%,” the analysts say. That is despite expectations that inflation will rise again by the end of the year as petrol prices start to make a stronger positive contribution to inflation. “All in all, we expect the headline rate to remain high in 2017, averaging around 8.5%.”

Turkey's CPI Inflation (y/y)
  Weights Dec-15 Jan Feb Mar Apr May Jun Jul Aug
Headline 100 8.81 9.58 8.78 7.46 6.57 6.58 7.64 8.79 8.05
Food and non-alcoholic beverages 23.68 10.87 11.69 8.83 4.58 1.38 2.47 6.63 9.69 6.19
Alcoholic beverages and tobacco 4.98 5.68 11.17 12.78 12.79 12.84 12.79 12.8 19.36 23.03
Clothing and footwear 7.43 8.99 9.31 9.80 9.03 9.32 7.32 7.31 8.26 7.84
Housing, utilities 15.93 6.71 7.33 7.22 6.63 6.59 6.51 6.68 6.69 6.82
Furnishings, household equipment 8.02 10.95 10.75 11.04 11.09 10.38 9.18 9.75 8.21 8.25
Health 2.66 7.16 8.14 9.20 9.43 9.58 9.58 9.81 10.58 10.6
Transportation 14.31 6.4 7.37 6.32 6.19 6.41 5.72 6.45 6.13 6.74
Communications 4.42 3.56 2.64 1.26 1.19 1.77 2.86 3.07 4.49 3.6
Recreation and culture 3.81 11.56 12.05 11.25 9.6 9.16 8.97 5.97 7.31 5.63
Education 2.56 6.39 6.46 6.66 6.94 6.93 7.56 7.82 7.89 9.18
Hotels, cafes and restaurants 7.47 13.23 13.43 13.12 12.26 11.35 10.59 9.95 9.96 8.63
Miscellaneous goods and services 4.73 11.00 11.21 12.00 12.39 11.25 11.87 11.33 12.68 11.84
Source: tuik                    

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