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Turkish inflation rises to 19.6 percent after surprise rate cut

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Turkey’s annual inflation rose to 19.58 percent in September, its highest in two-and-a-half years, data showed on Monday, pushing real yields further into negative territory after the central bank surprised markets by cutting its policy rate last month, Reuters reported.

Inflation was slightly less than expected. But it has remained in double-digits for most of the past five years and emerged as a main concern for investors and savers given political pressure for easier monetary policy.

Month-on-month, consumer prices rose 1.25 percent in September, the Turkish Statistical Institute said, compared to a Reuters poll forecast of 1.35 percent and an annual forecast of 19.7 percent.

After headline inflation rose above the policy rate in August, the central bank started emphasizing core “C” inflation, and later cut its key rate (TRINT=ECI) by 100 basis points to 18 percent. The “C” measure also rose to 16.98 percent in September.

The bank will likely cut rates again this month due to political pressure despite the rise in both core and headline inflation, said Jason Tuvey, senior EM economist at Capital Economics, adding core inflation was still below its June peak.

“With inflation likely to fall sharply in the final couple of months of the year and early next year, further aggressive easing lies in store,” he said, adding the lira is likely to decline sharply as a result.

The lira’s depreciation poses upward risks to inflation due to Turkey’s heavy import bill priced in hard currencies.

The monthly rise in September’s headline inflation was driven by the education group, which rose 5.15 percent, as schools re-opened, and the furniture group, which increased 3.33 percent.

Food prices

The food and non-alcoholic beverages group rose only 0.05 percent month-on-month in September but year-over-year it was the leading group, up 28.79 percent.

Tuvey said there were “early indications” that food price inflation had passed its peak, after driving the rise in the headline figure in recent months.

Central Bank Governor Şahap Kavcıoğlu said last week that pricing behavior is expected to return to pre-pandemic conditions as normalization progresses.

He said that it is difficult for monetary policy to have an effect on food prices, which were hit by drought and other factors.

The producer price index rose 1.55 percent month-on-month in September for an annual rise of 43.96 percent, the data showed, declining from a near three-year peak of 45.5 percent.

Annual inflation has marched higher all year. The official target is 5 percent.

In July, the central bank raised its year-end inflation forecast to 14.1 percent, bringing it closer to the market median, which has risen continuously throughout the year to 17.83 percent in the latest poll.

Oyak Securities said rate cuts should not continue after September’s inflation data, adding that guidance by the central bank during an investor meeting this week will be important.

The lira weakened 0.2 percent after the inflation data release and touched 8.880 to the US dollar. It hit a record low of 8.9490 after the rate cut and is down some 17 percent this year.

After last month’s cut, economists now expect the bank to lower its policy rate further by the end of the year and several institutions forecast a cut to 15 percent by mid-2022.

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