Turkish central bank “sits on hands” as inflation hits 9-year high

Turkish central bank “sits on hands” as inflation hits 9-year high
The politicians are looming large over Turkish monetary policy.
By bne IntelliNews November 3, 2017

Analysts were scathing of Turkish central bank inaction on November 3 as the latest inflation figures showed consumer prices had accelerated to a nine-year high. Annual inflation moved up from 11.2% in September to 11.9% in October, the steepest level recorded since October 2008, data from national statistics office TUIK showed.

One analyst, Timothy Ash, a senior sovereign strategist at BlueBay Asset Management, responded in a note to investors: “Meanwhile, the CBRT [Central Bank of the Republic of Turkey] just sits on its hands. No new tightening. Credibility on the inflation front shot through.”

While facing orthodox pressure from economists for monetary tightening, the CBRT is at the same time still under sustained unorthodox pressure from Turkish President Recep Tayyip Erdogan and ministers for loosening. In one of the latest examples of such a stance from the government, Turkish PM Binali Yildirim on October 17 said the government was working to lower interest rates to acceptable levels. This caused Ash to issue a wry rebuke, saying: “He is totally correct [about rates being disproportionate]. Given overheating traits as reflected in high and rising inflation and the widening current account deficit, rates need to be higher!”

Four days previously, Erdogan, reiterating his rather unconventional view that the main cause of inflation is high interest rates, said he planned to hold talks with both public and private lenders on how to lower interest rates.

In a second note to investors, Ash expanded on anxieties in regard to the CBRT’s inaction, saying the regulator seemed to be in “in something of a political strait-jacket at this stage, with Erdogan significantly shaping monetary policy”. The strategist advised: “CBRT strategy seems pretty clear—to hold the line on rates, not further tightening, and try and ride out near term rising inflation. They hope to hold out until base period effects bring some relief. The CBRT has been arguing that this should be in December, but I think this is becoming even less likely now, given exchange rate pass-through, wage price pressure, energy price pressure, and the impact of tax hikes. Likely the drop-off in inflation will only come now in Q1 2018, if then. 

“Key seems to be the exchange rate from the CBRT perspective—if the TRY [Turkish lira] depreciation can be managed, so just drifting gradually lower, say to 4 [to the USD] by year-end, the CBRT likely will think it can avoid rate hikes. Obviously things change if the TRY moves more quickly to 4+, and this would force the CBRT's hand. The problem is that even a gradual drift weaker in the TRY still implies an inflation pass-through, further pushing out the base period drop in inflation.”

The existing picture suggested, said Ash, that “the CBRT is winging all this—living on something of a prayer. Hoping base period, or external factors, i.e. liquid global financing conditions, somehow help them.”

On October 26, the CBRT, which is battling both double-digit inflation and the volatile and depreciating Turkish lira (TRY), opted to keep its one-week repo (8%), overnight lending (9.25%) and borrowing (7.25%) rates on hold. The market was also not surprised by the national lender's decision to keep the late liquidity window-lending rate (12.25%) unchanged, as outlined in a press release put out after the Monetary Policy Committee (MPC) meeting.

Citing lira depreciation and higher energy prices, the CBRT on November 2 said it anticipated a price growth surge that started in October would run through November. The regulator lifted its 2017 inflation forecast to 9.8% from 8.7%, adding that it was also predicting that inflation would come down markedly to a still elevated level in December amid base effects. The central bank said it is forecasting an inflation rate of 7% by the end of 2018 and 6% by the end of 2019.

The latest TUIK inflation data also showed Turkish consumer prices increased by 2.88% m/m in October, well above the market expectation for a 1.7% m/m hike. The main drivers were food and clothing prices. Food costs rose by 1.97% m/m while clothing prices increased by 11.5% m/m, adding 0.42 and 0.82 percentage points to headline inflation, respectively. Transport costs were up 2.6% and housing prices rose 0.94% m/m in the month.

Core inflation at near-14 year high
The annual rise in the C-index, one of the central bank’s favourite core inflation indicators, quickened from 10.98% in September to 11.82% in October, the highest annual rise recorded since January 2004 when core inflation was at 12.09% y/y.

TUIK also reported that domestic producer prices rose 1.71% m/m last month after rising 0.85% in the previous month, bringing the annual increase from 16.28% y/y in September to 17.28% in October.

The TRY was trading at 3.8270 per dollar, down 0.78% d/d, as of 10:45 local time after the data release on November 3. The currency has also been unsettled by the continuing political rows with Germany, which reports say have resulted in Berlin attempting to tighten how much financing flows to Turkey from European development banks, and the diplomatic spat with the US over the arrest of an American embassy worker, which has resulted in Washington and Ankara mutually suspending non-immigrant visa services.