Turkish Annual Inflation Ticks Higher but Monthly Pressures Ease

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(Bloomberg) — Turkish inflation accelerated for a second consecutive month in May, though a slowdown in monthly price growth may ease pressure on policymakers ahead of an interest-rate decision next week.

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Annual inflation rose to 32.6% in May from 32.4% the prior month, official data on Friday showed. The median forecast in a Bloomberg survey of 17 economists was 32.5%. Monthly inflation slowed to 1.7% from 4.2% in April, just above the median forecast of 1.6% in a Bloomberg survey.

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Longer-dated bonds retreated slightly, with the yield on five- and 10-year government bonds rising 11 basis points and 4 basis points, respectively. The lira was down 0.1% against the dollar.

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“Inflation significantly slowed down on a monthly basis, which is why there’s limited impact on yields and the currency,” said Onur Ilgen, head of Treasury at MUFG Bank Turkey. The latest inflation data supports the case for the central bank to keep interest rates unchanged at next week’s policy meeting, he said. “Growth data and loan restrictions reduce the need for further tightening,” he added.

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Turkish stocks fell, meanwhile, led by declines in banks. The Borsa Istanbul Banks Index fell as much as 2.2% before trading 1.8% lower as of 10:13 a.m. in Istanbul.

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Clothing and footwear were the largest contributor to monthly inflation in May, while prices for food and non-alcoholic beverages edged lower.

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What Bloomberg Economics Says…

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Turkish inflation defied gravity in May — backing our forecast for a choppy slowdown ahead. We now see year-end inflation just under 30%, well above the central bank’s 26% forecast, with risks strongly tilted to the upside due to pressure from the Iran war and weak lira sentiment. That should keep the policy rate on hold this year at 37%. 

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— Selva Bahar Baziki, economist. Click here to read more.

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Turkish policymakers have been grappling with how to respond to the fallout of the war. Higher energy prices have taken an economic toll on the country, which is a major oil and gas importer, and contributed to a reversal of its disinflation trend.

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In response to these effects, the central bank last month suspended the use of its year-end inflation forecast range, citing “a period of high uncertainty.” It’s targeting a year-end rate of 24%.

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The bank is monitoring the conflict’s secondary effects, Governor Fatih Karahan said, adding that Turkey’s inflation outlook is tied to the war’s duration.

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The Monetary Policy Committee, led by Karahan, kept interest rates unchanged at 37% in April. Following the outbreak of the conflict, on Feb. 28, the bank tightened liquidity conditions by pausing funding from that main policy rate and switching to a costlier, overnight rate of 40%.

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