Inflation Going the Wrong Way for Turkey After Rate Cuts Paused
(Bloomberg) -- A pickup in Turkey's inflation is becoming hard to ignore even for a central bank that spent almost an entire year cutting interest rates.
Faster cost increases for food and energy kept inflation accelerating for a second month in June. Consumer prices rose an annual 12.6% after a gain of 11.4% in May, more than the median of 12% in a Bloomberg survey of 22 analysts.
Read more: Turkey Surprises With No Rate Cut for First Time in a Year
Turkey's central bank, which said it expects a rise in the cost of raw food and energy in June, surprised by holding rates last week for the first time since Governor Murat Uysal took the job in July 2019. Policy makers will likely raise their inflation forecasts in a quarterly report scheduled for later this month, according to Enver Erkan, an economist at Tera Securities in Istanbul.
“We do not consider the decisions taken at the June meeting to be a major policy change,” Erkan said by email. “But if the inflation risks will remain elevated, this indicates that the central bank does not have much room to cut interest rates and rate cuts are approaching the end.”
Until this month, the central bank delivered 1,575 basis points of easing in nine consecutive steps, leaving Turkey's inflation-adjusted rates among the lowest in the world.
Meantime, Turkish policy makers and lenders are pumping money into the economy at the fastest pace in over a decade to contain the fallout of the coronavirus pandemic, a move that risks further weakening the currency and stoking inflation. The lira is one of this year's five worst performers in emerging markets with a loss of about 13% against the dollar.
Policy makers believe they still provide a “reasonable” real rate of return based on projected price growth. In April, the central bank lowered its inflation expectations for the end of this year to 7.4%, less than a previous forecast of 8.2%. The monetary authority said last week that “demand-driven disinflationary effects” will become more pronounced in the second half.
Read more: TURKEY INSIGHT: Promising Recovery -- High-Frequency Dashboard
While an improving economy may not warrant more easing, economists at JPMorgan Chase & Co. predict the central bank may cut rates one more time -- by 25 basis points -- but only once it's more confident on the inflation trajectory in the short term.
“Given the recovery in economic activity, persisting risks to disinflation, already negative real interest rates, and ongoing capital outflows, the easing cycle may indeed be over,” JPMorgan analysts including Yarkin Cebeci said in a report to clients
©2020 Bloomberg L.P.
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