TurkStat data shows that the annual rate of inflation in Turkey slowed from 52% to 49.4% by September 2024.
The drop was significant, but still exceeded the expectations of economists who had predicted a fall to 48.3%.
The central bank’s preferred measure of inflation, the monthly rate, soared above all expectations to 2,97%, further complicating monetary policy.
Investors are now expressing concern over the latest data, and many have begun to doubt the possibility of the anticipated rate cuts for the fourth quarter.
Inflation gauge of the central bank soared in September
The central bank’s main metric, the monthly inflation rate, increased by 2.97 percent in September.
The rate was significantly higher than August’s 2.47% and far above the forecast of a Bloomberg poll.
The price of education played an important role in the inflation surge, with a jump from 14.2% to 15.7% in just one month.
The increase in tuition fees was primarily due to the rising cost of school buses and bus fare, which were highlighted as areas that could be problematic for inflation by the Monetary Policy Committee’s (MPC) September minutes.
Hande Sekerci, an economist from Is Portfoy pointed out that the inflation rate in housing, education, clothing and restaurants was higher than expected.
Sekerci warns that the inflation rate in services remains “sticky”, making it hard to stop the rise in prices.
Goldman Sachs revised its rate reduction predictions
Goldman Sachs Group Inc. was among financial institutions that predicted a November rate reduction before the most recent inflation report.
However, the stronger-than-expected inflation print has thrown these projections into doubt.
The Turkish Central Bank has held its benchmark rate for six months. However, it loosened up its position in September and some analysts believed that a cut was imminent.
Sekerci, among others, has suggested that rate cuts could be delayed until 2025 if inflation continues to improve.
Following the publication of inflation data, the Turkish Lira reversed its losses and was trading at 34.2051 by 10:13 am Istanbul time.
The lira is still under pressure despite this stabilisation as the inflation rate continues to impact household and corporate prices expectations.
The expectations of the market have been far above those projected by the central bank, complicating further the battle against inflation.
First time in 3 years, real interest rates are positive
The first positive change for Turkey’s Central Bank is the fact that real interest rates are now positive.
Adjusted for inflation, borrowing costs in the country are above zero now that inflation is below 50% of the key rate.
It is a significant development because it represents a rare instance where the inflation-adjusted rate favours the central bank.
Tufan Comert is an emerging markets strategist with BBVA London. He warned the future remains difficult.
Even if the inflation rate averages only 2% in the next 3 months, it is expected that year-end inflation will still reach 44%.
Comert says that rate reductions could now be delayed until 2025.
Further rate cuts are delayed as inflation concerns persist
MPC must tread lightly as it negotiates the inflationary landscape in Turkey.
It seems unlikely that central banks will cut rates in the near future, given the high inflation and the core price pressures.
Fatih Karahan, the governor of the Turkish central bank is scheduled to speak to lawmakers in the Turkish Parliament later today. He is expected to give further insight into the policy direction taken by the bank.
Many observers will be eager to learn how the central banks plans to combat the persisting inflationary pressures.
Forecast for inflation in Turkey
Turkey’s high inflation rate is a concern to both policymakers and investors.
While annual inflation has fallen below 50%, pressures on the core, especially in the service sector, are continuing to undermine price stability.
Even though it is under pressure to reduce borrowing rates to boost growth, the central bank must remain vigilant to fight inflation.
Some experts are pushing back the date of monetary ease to 2025.
How inflation develops in the next few months will be a major factor, especially the effect of certain sectors, such as housing, education and services.
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