Turkish inflation again worse than expectations but with a weaker punch

Turkish inflation again worse than expectations but with a weaker punch
By Akin Nazli in Belgrade November 5, 2018

Turkey’s annual consumer price inflation rate moved up to 25.24% in October from 24.52% in Septemberthe Turkish Statistical Institute (TUIK) announced on November 5. It is the highest level on record since the end of 2003 and slightly exceeded expectations.

Respondents to a Bloomberg poll forecast the rate would be 25% whereas Capital Economics anticipated a figure of 25.5%. A Reuters survey produced an average expectation of 24.5%, with predictions ranging from 22.17% to 28%.

Monthly inflation for October stood at 2.7%, following the 6.3% posted for September, which marked the highest month on month jump seen since 2001. That leap compared to the 2% forecast by a prior Reuters survey.

Eighteen institutions that participated in a Reuters survey to determine likely inflation at end-2018 inflation on average predicted 23.5%, compared to the 21% they foresaw in the previous survey.

On October 31, the central bank for the fourth time this year sharply raised its end-year CPI inflation forecast to 23.5%. It also dramatically hiked its food inflation estimate for 2018, moving it up to 29.5% from the July forecast of 13%, while its average oil price estimate was revised up to $75 per barrel from $73.

“We expect inflation to come down gradually to 24% in December,” Nora Neuteboom of ABN Amro Bank said in a tweet.

 “October data shows that the inflation outlook remains poor driven by cost factors. Inflation likely has more room to run given that domestic PPI stands at around 45%. Going forward, developments in the exchange rate and food prices will likely determine the CPI trend, given an ongoing slowdown in demand pressures. The current uptrend will continue a few months more and likely peak in early 2019, with upside risks prevailing in the short-term,” Muhammet Mercan of ING Bak said in a research note.

Turkey’s ‘real’ interest rate, which returned to negative territory after September’s jump in annual inflation, rose to 124bp in October, after, as widely expectedthe rate-setters at Turkey’s central bank on October 25 opted to keep the national lender’s policy rate at 24%.

‘Risk of premature loosening’
The stronger-than-expected rise in October inflation is unlikely to prompt further interest rate hikes from the central bank, Jason Tuvey of Capital Economics said in a research note, adding: “Instead, the main risk is that, with pipeline price pressures easing and the headline now at or close to a peak, the MPC loosens policy prematurely.”

Timothy Ash of Bluebay Asset Management also said the latest inflation print would be a relief in Turkish policy circles. “Not that bad—could have been much worse after the terrible September print,” he said in a note to investors, adding: “Turkey is undergoing a brutal hard landing with the data suggesting a significant negative real GDP print in the year ahead.”

Given the huge economic downturn under way, and the massive rebalancing reflected in the much-improved trade and current accounts, there would be a sense that the data was offering hope of a turning point for Turkey, said Ash. “They will assume, rightly, that deflation and recession will eventually do the trick on inflation. But they need time. This inflation data gives them a bit more.”

In the minutes of the latest central bank monetary policy committee meeting released on October 31, the regulator said that monetary policy decisions would be more sensitive to incoming data in the short run and that its monetary policy stance would be revised upon the detection of inflation outlook changes.

“This feeds our suspicion that September’s rate hike didn’t mark a shift back to orthodoxy. It seems that as soon as there are signs inflation is falling, the central bank will start cutting rates to support the economy. The upshot is that policymakers will fail to tackle the inflation problem. Indeed, the government also appears to be moving away from orthodoxy—it announced a series of tax cuts this week which will hinder the rebalancing of the economy that is needed to bring inflation down on a sustained basis,” Tuvey said on November 2.

Another factor that could weigh on fiscal and monetary discipline in Turkey in the months ahead is the local elections scheduled for March next year.

Latest tax cuts “credit negative”
Turkey's latest tax cuts, which surprised markets last week, would boost consumption temporarily, but were credit negative and risked rekindling Turkish lira (TRY) pressure, Moody’s Investor Services said on November 5 in its latest credit outlook report, adding: “Besides being ineffective on the inflation front, the tax cuts will be too short-lived to provide more than a temporary boost to consumption, particularly amid very high interest rates that will curtail borrowing for expensive articles such as cars and white goods.”

Although Moody’s did not believe the tax cuts would have a perceptible negative effect on the government's budget given their temporary nature, “any signals from the government that it will renege on its commitment to fiscal consolidation would be seen negatively in foreign-currency markets, since increased government spending would suggest that the authorities are seeking to halt economic rebalancing”.

“Important for the central bank and finance minister Berat Albayrak to hold their nerve now in terms of messaging. To fight inflation they need to stay hawkish in rhetoric and actions. They are still in the eye of the storm but at least can see way out now,” Ash said in a tweet.

The breakdown of the data showed that the increase in inflation last month was broad-based, according to Tuvey. Of the 12 major price categories, inflation rose in 10.

Clothing, food, utilities and home appliances, were the major drivers, according to Mercan at ING.

Annual food inflation, which makes up nearly a quarter of the consumer price inflation basket, rose further to 29.3% in October from 27.7% in September while annual inflation in transportation prices, the second largest sub-item in the basket, fell to 32% y/y from 36.61% y/y.

“A continued deterioration in goods inflation, especially energy, core goods and processed foods, reflecting the ongoing impact of the decline in the Turkish lira and administrative adjustments. Still, unprocessed foods recorded lower price increases than suggested by seasonal trends. [There was a] continued rise in sticky services inflation though transportation services showed price declines,” Mercan also said, adding: “Broad-based price adjustments continue, with more than 80% of items in the CPI basket registering increases. The decline in the Turkish lira continues to feed through to prices, even though a large portion of this adjustment was seen in the September data.”

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.

Rampant for seven months
After last November’s 12.98%, there was a slow descent to the March figure of 10.23% before the rate ran rampant in the following seven months.

Meanwhile, the deterioration in core inflation metrics continued in October.

The annual rise in the C-index, one of the central bank’s favourite core inflation indicators, hit another fresh record—the sixth in a row since May—at 24.34% from the previous record high of 24.05% seen in September.

The TRY was trading at 5.4467 against the USD, weaker by 0.29% d/d, as of 15:00 local time. Lira bulls are currently riding on a period of improving relations that has emerged between Turkish President Recep Tayyip Erdogan and US President Donald Trump. It began with the release of US pastor Andrew Brunson last month but there are many other issues to resolve, such as a potential US fine for Halkbank, an exit from the Jamal Khashoggi murder affair and a row over Nato member Turkey’s plan to acquire Russian military hardware, before the diplomatic rift between Ankara and Washington can be said to be over.

The lira has recouped a significant amount of its lost ground since the currency crisis intensified in August—it is up by around 20% against the USD from its trough, according to Tuvey. “There are tentative signs that this is helping to ease pipeline price pressures.”

The annual producer price index (PPI) declined, for the first time since January, to 45.01% in October from 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 skyrocketed up until September in parallel with the severe depreciation in the lira.