Turkey Inflation Jump Leaves Leeway for Central Bank Easing

(Bloomberg) --

Turkish inflation bounced back to double-digits in November, but didn't heat up enough to block further monetary easing.

Annual inflation accelerated to 10.6% from 8.6% in October, according to data released by Turkstat on Tuesday. That still makes Turkey's 3.4% real interest rate among the highest in emerging markets, leaving room for further rate cuts.

Turkey's central bank slashed borrowing costs by a total of 10 percentage points at its last three meetings, bringing its benchmark interest rate to 14%. Although the reversal in inflation's downward path could prevent another aggressive cut at this year's final meeting on Dec. 12, Central Bank Governor Murat Uysal will feel pressure to keep trimming from President Recep Tayyip Erdogan, who says both interest rates and inflation will fall permanently to single digits next year.

Turkey's headline inflation may be below the government's estimate of 12%, Treasury and Finance Minister Berat Albayrak tweeted after the data.

Morgan Stanley expects prices to keep rising in December, with inflation ending the year at 11.3%, economist Ercan Erguzel said in a report before the data. “Accordingly, we see limited space for further rate cuts at the last meeting of the year,” he said, predicting a 100 basis-point reduction to 13% this month and an additional cut of 200 basis points in the second half of 2020.

MUFG Bank Turkey AS predicts a 150- to 200 basis-point reduction at the central bank's next rate-setting meeting, Onur Ilgen, an Istanbul-based treasury manager, said by email after the inflation data.

Prices will continue to rise through the first quarter, according to Uysal, who has pledged to preserve “a reasonable rate” of return on investments after inflation is stripped out. He wouldn't specify when asked what he deems to be “reasonable.”

Inflation began to soar in June 2018 after a crash in the lira sent domestic prices in the import-dependent economy surging. After peaking at 25.2% in October 2018, it dropped by nearly 4 percentage points the following month after the government announced a wide range of tax cuts.

In its last quarterly report of the year, the central bank lowered its inflation estimate for the end of 2019 to 12%.

--With assistance from Inci Ozbek.

To contact the reporter on this story: Cagan Koc in Istanbul at ckoc2@bloomberg.net

To contact the editors responsible for this story: Onur Ant at oant@bloomberg.net, Amy Teibel, Michael Gunn

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