Consumer prices rose by 0.89% m/m in September (Reuters survey: 0.80% m/m), bringing the annual inflation rate from 7.14% in August to 7.95%, data of the statistics office showed on October 5.

The central bank has warned that exchange rate movements delay the improvement in the core indicators and the latest data showed the adverse effects of the depreciation of the local currency on prices. TRY is expected to remain under pressure given the ongoing political uncertainty and heightened security concerns as well as geopolitical risks. In a recent report Morgan Stanley argued that currency depreciation is likely to damage the inflation outlook in the last quarter of the year. In line with this, the investment bank increased its year-end CPI expectation to 8.0% from 7.6%. Fitch revised its 2015 inflation expectation up to 7.1%, reflecting the depreciation of TRY, and expects a 6.4% inflation next year based on the assumption of more currency stability and a tightening policy from the central bank, Fitch Ratings Senior Director Paul Gamble said on September 22. End-year inflation expectations rose to 7.98% y/y in September on the back of higher than expected August inflation.

The Turkish economy continues to feel the effects of the country’s escalating violence and political instability at a time when it should be benefiting from tumbling oil prices. The Turkish lira has already lost more than 20% of its value against the dollar this year, consumer confidence has hit rock bottom, unemployment hovers around 10%, exports are falling, the current account deficit – though declining – is still large, and inflation is stubbornly high at 7%.

Central Bank Governor Erdem Basci said on September 29 that the monetary authority maintains a tight policy stance to address inflationary risks from the exchange rate pass-through and higher inflation expectations. Inflation is expected to rise further in September due to exchange rate effects and the volatility in unprocessed food prices, the Central Bank of Turkey said on September 23. CPI inflation in Turkey generally picks up in September due to rising demand as a result of the launch of the school term and preparations for the winter season, however, the Central Bank also addressed exchange rate effect and food prices this time. The central bank of Turkey kept key interest rates steady at the monetary policy committee (MPC) meeting on September 22. Energy price developments affect inflation favorably in the short run, while exchange rate movements delay the improvement in the core indicators, according the MPC. Considering the impact of the uncertainty in domestic and global markets on inflation expectations and taking into account the volatility in energy and food prices, the Committee decided to maintain the tight liquidity stance as long as deemed necessary.

Recently published macroeconomic indicators are not promising. Consumer confidence hit its lowest level in more than six years, confirming expectations that GDP growth will slow in the second half of the year. Turkish lira is one of the worst performing emerging markets currencies this year.