Turkish Inflation Nearing Peak While Central Bank Looks Away

(Bloomberg) -- A slowdown in Turkish inflation might still be at least a month away, after another uptick in prices pushed the country's real interest rates further below zero.

Turkey's central bank has for now looked past the acceleration, relying on its expectations for inflation at the end of the year. Consumer prices rose an annual 12.4% last month, the most since August, according to data released on Tuesday. The median of 22 forecasts in a Bloomberg survey was for 12.7%.

As global central banks set the stage for lower rates to stabilize markets jolted by the coronavirus, Governor Murat Uysal is almost certain to stick with an easing cycle started after his appointment last July, especially after inflation quickened less than anticipated in February. The Turkish central bank contends it still offers investors a positive real rate of return when taking the projected path of inflation into account.

Policy makers predict inflation will end the year at 8.2%, with their benchmark currently at 10.75%.

“While recent lira weakness and recovering domestic demand conditions exert upward risks ahead, lower global oil prices would work in the opposite direction,” Deutsche Bank AG analysts including Kubilay Ozturk said in a report before the data release. “Barring any disorderly depreciation in the lira, due to external and geopolitical headlines, we think Turkey's central bank will carry on with policy easing.”

Inflation is increasingly coming under pressure from a recovery in consumer demand, rising food costs and a broader rebound in the economy.

But it's the lira's performance that's more likely to dictate the central bank's next steps. Authorities have stepped up their interventions to slow the currency's slide as Turkey's involvement in the conflict in Syria escalates. Still, it's among the worst performers in developing Europe this year with a loss of 3.5% against the dollar.

The Turkish currency was trading 0.2% stronger at 6.1654 per dollar as of 4:22 p.m. in Istanbul.

“The ongoing depreciation in the lira, both on the back of geopolitical developments in Syria and coronavirus related global risk sentiment, remains the biggest medium-term risk to inflation,” Barclays economists led by Michael Kafe said in a report.

--With assistance from Abeer Abu Omar, Harumi Ichikura and Paul Wallace.

To contact the reporter on this story: Paul Abelsky in Dubai at pabelsky@bloomberg.net

To contact the editors responsible for this story: Lin Noueihed at lnoueihed@bloomberg.net, Paul Abelsky, Paul Wallace

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