Turkey’s annual consumer price inflation rate has fallen for the first time since March—and sharply. November saw it fall 3.62 percentage points from October's 15-year high of 25.24% to 21.62%, the Turkish Statistical Institute (TUIK) announced on December 3.
Respondents to a Bloomberg poll and a Capital Economics forecast had anticipated that the rate would turn out to be 23%.
Turkey's volatile monthly inflation was in November negative for the first time since June 2017, at 1.44%. That marked the biggest monthly decrease since 1991, Fercan Yalinkilic of Bloomberg noted on Twitter, adding: “Again the y/y decrease in M1, M3 growth, showed that inflation would be around 20%.”
The Turkish lira (TRY) was trading at 5.2477 against the USD, weaker by 0.69% d/d, as of around 18:10 local time after a 3.43% d/d rise in the Brent oil price to $61.5 per barrel, taking the price to more than $60 once more and representing a blow to Turkey, a big energy importer.
Steep recession, scope for rapid disinflation
“[The fall in Turkey's November inflation] shows the impact of a bit of orthodox monetary policy. Shame that the authorities did not do this much earlier in the year - like back in April/May. The real econ[omy] is now paying the price with a steep recession, albeit this creates scope for rapid disinflation,” Timothy Ash of Bluebay Asset Management said on Twitter.
As a confirmatory sign of an ongoing recession, the foreign trade shortfall contracted by 91% y/y to $604mn after falling in October by 94% y/y to the lowest monthly level since 2001, preliminary customs ministry data showed on December 1.
Turkey’s Purchasing Managers’ Index (PMI) for manufacturing in November slightly rose to 44.7 but remained in contraction territory, below the 50-level, for the eighth straight month since April, IHS Markit said on December 3.
Turkey’s economy will contract 1.4% y/y in Q4 and officially enter a recession—defined as two consecutive quarters of negative growth—in Q1 2019, a Reuters poll predicted in October.
“Headline, core and PPI all surprised on the downside. Shows impact of recessionary conditions plus newfound strength and stability of the lira,” Ash added in a note to investors.
Turkey’s policies have included the dismissal of the deputy TUIK director with responsibility for the inflation data along with a so-called all-out-war against inflation pushing the private sector to “voluntarily” cut prices of items included in TUIK’s inflation basket by 10% for two months, tax cuts, raids on onion warehouses, price controls, and encouraging local lenders to “voluntarily” cut interest rates.
Onion prices posted the highest monthly rise, at 51%, of all the components of the inflation basket in November.
“We will continue to carry forward the structural steps that we have started in the fight against inflation with all our ministries,” Turkish President Recep Tayyip Erdogan’s son-in-law and finance minister Berat Albayrak said on Twitter, adding that the downward trend in inflation would continue.
Durable goods play "major role"
“Durable goods played the major role in the inflation moderation. Actually, food inflation and energy inflation (both at -0.7%) are broadly in line with our expectations. That said, it seems that price discounts related to the temporary tax cuts and all-out war against inflation, and partly due to the TRY’s strengthening, were somewhat higher than expectations. For example, the 12-14% fall in automotive prices alone led to a 0.9% decline in inflation. There was also a 10-15% fall in computer and TV prices and 4-7% fall in white goods prices, which all led to a 9.6% decline in the durable goods component of the inflation basket,” Serkan Gonencler of Seker Invest said in a research note entitled “Voluntary price discounts and tax cuts loom large on inflation”.
He added: “Services prices also eased compared to previous months, remaining flat MoM (1.1% in Oct, 3.0% in Sep, 1.9% in Aug). On the services front, we may highlight the 14% decline in plane ticket prices and the 23% fall in holiday tour prices, which all seems related to voluntary price discounts in the context of the 'all-out-war' against inflation. That said, annual services inflation only eased to 14.7% from 14.8%, which is much less pronounced compared to the easing in durable goods inflation. The 2.4% MoM seasonal rise in the clothing component is somewhat less than what historical trends suggest, which might also be related to voluntary price discounts.
“Voluntary price discounts and tax cuts loom large on inflation, but pricing pressures continue on fast moving consumer goods. All of the above-mentioned factors helped core CPI inflation (group C) to register a 1.9% MoM fall, also leading to a decline to 20.7% in annual terms from [a record high of] 24.3%. Accordingly, we may easily suggest that the easing in core inflation as a result of the tax cuts and voluntary price discounts has been the major factor behind the moderation in inflation. That said, we also have to highlight that with a 1.4% MoM increase, the upside pressure on other core goods (fast consumer products) prices seems to have lingered into November. As a result, annual inflation for the other core goods component continued to rise, to 38.8% from 38.3% last month,” Gonencler continued.
“Moderation not yet a cause of relief”
“The moderation in inflation is positive, but not yet a cause of relief. All in all, there has been more than a 3.5pp fall in annual CPI inflation, which is without doubt positive and supportive of current market sentiment. Nevertheless, it should also be kept in mind that this decline is mostly due to seemingly temporary factors, such as tax cuts and voluntary price discounts, which might be reversed in early 2019. As a result, we still advise some caution as to the disinflation trend until we see a sustained decline in inflation (which might probably take place in 2H19),” Gonencler warned.
“Tax cuts for automotive, white goods and furniture sectors were the key factor bringing down inflation. We expect a limited increase in December inflation as the initial impact of tax cuts wanes,” Muammer Komurcuoglu of Is Investment told Reuters.
“The inflation has come off its peak and will likely close this year below 22%. However, we expect to see some further inflationary pressures in early 2019 before falling more rapidly in the second half given the impact of a reversal in temporary tax cuts and unfavourable base effects. As inflation remains elevated, the [central bank] should maintain a tight stance to fight inflation and re-anchor inflation expectations as policy credibility will remain key in the period ahead,” Muhammet Mercan of ING Bank said in a research note, adding: “The favourable monthly reading is largely down to tax cuts in consumer durables, furniture and automobile introduced by the government in early November, a likely impact of temporary price discounts in targeted items in the consumer basket, with the government’s decision of price freezes and voluntary private sector involvement, as well as sharp decline in oil prices. Accordingly, we saw a recovery in goods' inflation from 29.6% a month ago to 24.5% with significant contributions from energy, unprocessed food and core goods. Also evident is a broadly unchanged sticky services inflation despite price drops in transportation services. On a positive note, annual rent inflation returned to a single-digit level at 9.8%.”
“We saw price declines in more than a quarter of items in the CPI basket. This shows not only the impact of recent government actions but it's also indicative of FX pass through almost running its course with sharp [lira] recovery,” Mercan also said, adding: “The PPI has returned from its September peak at 46.2 %, which shows some erosion in persisting producer-price-driven cost pressures on the back of commodity-related product groups and FX sensitive items with recent TRY strengthening.”
“#Turkey CPI drop … show[ed] that the economy is rapidly adjusting. While good news, we do expect further inflationary pressures going forward; inflation will likely peak in Q1 2019 (also due to base effects),” Nora Neuteboom of ABN Amro Bank said on Twitter.
The fall in November's inflation suggested that the central bank’s September interest rate hike is working its way through the economy, according to Bloomberg.
Odds shorten on rate cut
“The greater-than-expected fall in Turkish inflation in November increases the chances that the central bank pushes ahead with an interest cut in the coming months,” Jason Tuvey of Capital Economics said in a research note entitled “Fall in inflation could bring rate cuts further”, adding: “Against the backdrop of a stronger lira, falling inflation and weak economy activity, further interest rate hikes are now completely off the table. Instead, with political pressure on the central bank to loosen policy likely to mount, there’s a growing risk that policymakers decide to loosen policy even earlier, and more aggressively, than we currently anticipate. For now, though, we are keeping our forecast for the benchmark one-week repo rate to be lowered from 24.00% at present to 20.00% by the end of next year.”
Annual energy inflation slowed to 25.4% in November from 29.4% in October as oil lost more than a fifth of its value during the month, resulting in retail price cuts for refined products, according to Bloomberg.
“Transportation stood out with the largest negative contribution [to the headline inflation] at 1.17pp thanks to double-digit price declines in automobile and a drop in energy prices. Accordingly, annual inflation in this group was 21% vs 32% a month ago, showing the impact of a favourable trend in oil, TRY strength and tax cuts,” Mercan also said.
“By our estimates, the latest moves in oil prices could knock an average of about 0.4%-pts off headline inflation over the next few months. The impact is likely to be greatest in Hungary and Turkey, where petrol occupies a larger share of the CPI basket. This might not show up fully in the November figures – the Polish flash CPI estimate for this month showed only a modest fall in fuel inflation. But it should have fed through by year-end,” Liam Carson of Capital Economics said on November 30 in a research note, adding: “We had, in any case, expected oil prices to fall, even when the talk was of prices rising to $100pb. And other factors, notably rising food inflation and underlying core price pressures, mean we expect headline inflation to increase over the next 12 months in most places.”
“We doubt that [the expected fall in Turkey’s November inflation] will prompt an immediate policy response when the MPC [Monetary Policy Committee] which meets on 13th December. But with inflation falling, the lira strengthening and evidence mounting that the economy is in recession, policymakers are likely to strike a more dovish tone. We currently expect the MPC to start lowering interest rates around the middle of next year, but there’s a growing risk that it moves even earlier,” Carson added.
“In large part, last month’s drop in inflation reflected the impact of a stronger lira – the currency has risen by around 35% against the dollar from its trough in August. That has helped to reduce imported inflation. In addition, with the economy seemingly in the midst of a deep recession, firms may have offered discounts to consumers in response to weaker demand,” according to Tuvey.
The breakdown of the TUIK’s latest inflation data showed that the fall in inflation was broad-based. Of the 12 major price categories, inflation fell in 10.
“Core inflation fell from 24.3% y/y in October to 20.7% y/y last month. And there appears to be further downward pressure on inflation in the pipeline – data also released today showed that producer price inflation dropped from 45.01% y/y in October to 38.4% y/y in November,” Tuvey also said.
Food price increases slowed to 25.7% from 29.3% the previous month, in a sign that the central bank’s 29.5% year-end estimate might prove to be realistic, Bloomberg also commented.