Resilient Turkish inflation tempers rate cut expectations

Turkish annual inflation dropped to 49.38% in September, but a higher-than-expected monthly rate of nearly 3% raised caution from the central bank. With the policy rate now above annual CPI, analysts predict interest rate cuts may not begin until next year despite earlier expectations.

Turkish annual inflation eased to 49.38% in September, while the monthly rate surged higher than expected to nearly 3%, prompting caution from the central bank and delaying anticipated interest rate cuts.

The central bank's policy rate, now at 50%, has surpassed the annual consumer price index (CPI) for the first time since 2021, marking a key point in the aggressive monetary tightening aimed at curbing inflation after years of easy money and rising prices.

However, Central Bank Governor Fatih Karahan warned that more progress is needed before reaching the bank’s inflation goals. He outlined two critical conditions: a significant and sustained decrease in the monthly inflation trend, and the alignment of expectations with the bank’s own forecast range. Last month’s inflation spike was partially driven by education-related costs.

Following the release of the inflation data, the lira strengthened slightly, trading at 34.18 against the dollar. Analysts have revised their expectations for interest rate cuts, with some now predicting no easing before next year. JPMorgan, which had initially forecast a cut in November, now expects easing to start in January. Capital Economics also sees a rate cut this year as "very unlikely." 

Month-on-month inflation was 2.97%, above the 2.2% predicted by a Reuters poll. The annual CPI also exceeded the forecast of 48.3%. In August, inflation was 2.47% month-on-month, with an annual rate of 51.97%.

Although the central bank is closely monitoring the monthly inflation rate for signs of when to begin easing, it has only fallen below 2% once this year, in June. Analysts like Haluk Burumcekci suggest that even if October inflation aligns with central bank guidance, it may not be enough to trigger a November rate cut, with most analysts now expecting easing by 2025.

TIGHT POLICY

Turkish domestic producer price index rose 1.37% month-on-month in September, with an annual increase of 33.09%. Inflation was driven by sharp rises in housing (97.9%) and education costs (93.59%), while food prices increased 43.72%.

The central bank held rates at 50% for a sixth month, signaling potential easing but maintaining a tight stance until price stability is achieved. Households expect 12-month inflation at 71.6%, much higher than market forecasts of 27.5%. The bank predicts inflation will fall to 38% by year-end, while the government expects 41.5%.

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