Market digests shocking Turkish inflation news: 24.5% exceeds all forecasts

Market digests shocking Turkish inflation news: 24.5% exceeds all forecasts
By Akin Nazli in Belgrade October 3, 2018

Turkey’s annual consumer price inflation rate sprang from 17.9% in August to 24.52% in September, the Turkish Statistical Institute (TUIK) announced on October 3. The figure marked the highest level recorded since the end of 2003 and came in at a worse level than all expectations.

The median estimates in surveys were for just above 21%. Monthly inflation for September was posted at 6.3%, the highest month on month jump seen since 2001. That compared to the 3.6% predicted by a Reuters survey, which also determined that the maximum forecast was for 4%.

“The larger-than-expected rise in Turkish inflation increases the chances of another interest rate hike at this month’s [October 25] MPC [monetary policy committee] meeting. But given the scale of last month’s rate hike [of 625bp] and continued bellicose comments from President [Recep Tayyip] Erdogan, we suspect that policy will be left unchanged,” Jason Tuvey of Capital Economics said in a research note. Borrowing costs are currently running at their highest in nearly two decades amid Turkey’s currency crisis.

“An inflation print so bad that it truly feels like old Turkey,” Inan Demir, an economist at Nomura International in London, was quoted as saying by Bloomberg. “But this is simply too bad to ignore. Note that annual headline inflation is now above the bank’s policy rate at 24%, which calls for another rate hike.”

Erdogan’s son-in-law and Finance and Treasury Minister Berat Albayrak said in a televised interview that inflation would now converge towards the government’s end-2018 target of 20.8%. The target was recently significantly revised up in the new medium-term economic programme. The central bank’s target rate remains 5%.

'Worst is over'
Concrete results of measures taken by the government will be seen in October data and the worst inflation news was now behind Turkey, Albayrak said during an interview on NTV. He also blamed hoarders and speculators for aggravating Turkey’s inflation dilemma.

The September data, however, did not include the latest hikes in natural gas and electricity prices. On October 1, state-owned pipeline operator Botas hiked natural gas prices for household users by 9% and for industry by 18.5%, while energy market watchdog EPDK hiked electricity prices for household users by 8% and for industry by 18%.

Natural gas and electricity prices for household users have been hiked by a cumulative 30% since the end of July and for industry by 48%.

The weight of electricity in the consumer price inflation basket is 2.39% while for natural gas it is 1.44%.

Inflation could rise towards 30% through the end of 2018, Gulay Elif Girgin of Sekerbank told BloombergHT. Something a little above 26% is possible at the end of the year in the eyes of Nilufer Sezgin of Is Portfoy.

The Turkish lira (TRY) was trading at 6.0211 against the USD, weaker by 0.89% d/d, as of 17:30 local time. The yield on Turkish 10-year benchmark domestic bonds rose to 19.44% from 18.30% on October 2 at closing prices. After the inflation news, Turkey’s dollar-denominated bonds fell, with Ankara’s 2030 maturing bonds seeing the biggest move, falling more than 1 cent in the dollar. Shorter-term 2020-2025 debt dropped between 0.2 and 0.6 cents, Tradeweb prices showed.

“Market (TRY) holding in I guess on assumption that this number is so bad, it is almost good, in terms of leaving the central bank with no option but to hike again on October 25 (at the next MPC meeting), and I assume also assumption of positive news on October 12 around (the US Pastor) [Andrew] Brunson [currently detained despite US demands for his release],” Timothy Ash of Bluebay Asset Management said in a tweet.

“I think this is a little beyond seasonal factors at this stage. Case of anchoring inflation expectations, and ASAP at this stage. Clearly economy going into deep recession, which will help deflation story. But they have to anchor the TRY as No.1 priority,” Ash added in another tweet.

'MPC stakes increase'
“Seems import inflation has done its work. Stakes increase for the October 25 MPC meeting; in order to establish their credibility the central bank has to again top expectations (while expectations will be much higher this time),” Nora Neuteboom of ABN Ambro Bank said.

Turkey’s inflation rate jumped into the double digits in February 2017. Since then the rate has only once moved back into the single digits, in July last year—and that was due to the base effect of an economic soft spot caused by the July 2016 failed coup.

After last November’s 12.98%, there was a slow descent to the March figure of 10.23% before the rate started to run rampant in the coming six months.

“The breakdown of the data showed a broad-based pick-up in price pressures. Indeed, inflation rose in all 12 of the major price categories,” Tuvey also said, adding “We suspect that inflation has a bit further to rise over the coming months.”

Annual food inflation, which makes up nearly a quarter of the consumer price inflation basket, rose further from 19.75% in August to 27.7% in September while annual inflation in transportation prices, the second largest sub-item in the basket, reached 36.61%.

“The good news in the awful Turkish inflation figure? Turkish statistics office credibility. A month ago locals and RenCap were questioning the reported 0.1% rise in August food prices. In September, food prices were up 6.4% MoM,” Charlie Robertson of RenCap remarked in a tweet.

Meanwhile, the deterioration in core inflation metrics and producer price inflation continued to escalate in September.

The annual rise in the C-index, one of the central bank’s favourite core inflation indicators, also hit a fresh record at 24.05%. The previous high was the 17.22% seen in August.

The annual producer price index (PPI) recorded a jump from 32.13% in August to 46.15% in September, the highest level seen since 2002, TUIK said in a separate statement.

The annual PPI rate fell to 12.14% in January, the lowest level posted since December 2016—but it has skyrocketed since then in parallel with the depreciation in the lira.

“The rise in oil prices to $85pb brings most major oil producers’ budgets close to balance (and in a few cases to a large surplus) and could open the door for fiscal policy to be loosened in a few countries in the Gulf. However, if the rise in oil prices is sustained, it will make the balance of payments adjustment needed in [big energy importer] Turkey and Argentina even more difficult,” James Swanston of Capital Economics said in a research note entitled “What does the latest jump in oil prices mean for EMs?”