Perhaps the biggest shock of all came from inflation registration, where Turkey defied expectations with a month-on-month increase of 3.1%, much higher than the expected increase of 2.5%. This unanticipated increase especially worries economists since it is a large departure from advance projections. While the year-on-year inflation figure was not provided in clear terms, analysts had already predicted that it would be close to 32.5%.
That recent 30% fare increase in Istanbul was a major factor in that inflation jump. That dramatic increase was enough to make waves on the transportation part of the inflation measure for the month of September. This new hit to service costs points to the mounting challenges across the board for Turkey’s foundering economic ship.
This has led some key policymakers to warn that inflation may continue to re-accelerate in the months ahead. This tells them that the cause of the re-acceleration is not just one-off factors like food or utility price increases. Instead, several fundamental core categories and services are pulling the strings hard, big-time on this trend.
Analysts are most worried about the drop in the Turkish lira’s value. It is doing so by currently declining at an alarming annualized rate of 40% based on a basket pegged to 50% USD and 50% EUR. The indirect effect of this depreciation acts to reduce any disinflation potential, adding more complexity to an already volatile economic picture.
“We would argue that known one-off factors – such as the 30% Istanbul fare hike, which impacted the transportation component for September – ought to have been incorporated by polled analysts, who follow these kinds of things.” – Commerzbank’s FX analyst Tatha Ghose
Analysts are estimating that interest rates will be reduced by about 100-150 basis points given where the economy stands now. This new expectation is a marked pivot from the previous prediction of 250 basis points. They caution that policymakers could be hard pressed to reverse course. Depending on the results of rising inflation, slowing down the economy may prove a heavy lift.
“Hence, we do not think that CBT will stop cutting rates. Perhaps the pace could slow down to 100-150bp from the last 250bp, but it could be difficult to reverse course or try additional things to comprehensively slow the economy down.”
Meanwhile, questions linger about whether these moves will stay the hand of the Central Bank of Turkey (CBT) as it pursues aggressive rate cuts in the months ahead. The political motivation is the only explanation according to some analysts who believe the impetus behind recent rate cuts. They contend these cuts don’t reflect the real economy.
“What does the development imply for the central bank’s (CBT’s) rate cuts? Not much, we reckon.”
For one, President Tayyip Erdogan is likely to apply pressure on central bank officials with these economic pressures. Analysts believe that Erdogan’s distinct tactics of applying pressure directly won’t work in this case.