Turkish Inflation Surprise Paves Way for Further Rate Cuts

Shoppers at the Mahmutpasha market in Istanbul. Photographer: Kerem Uzel/Bloomberg Photo by Kerem Uzel /Bloomberg

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(Bloomberg) — Turkish inflation slowed more than expected, giving a boost to monetary policymakers after last month’s decision to resume interest-rate cuts. 

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Consumer price rises eased to 33.5% in July on an annual basis from 35.1% the previous month, data from state statistics office TurkStat showed on Monday. The median forecast in a Bloomberg survey of analysts was for a rate of 34.1%, while the estimates ranged between 33.8% and 34.4%. 

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“This data will relieve the central bank,” said Hande Sekerci, chief economist at Is Asset Management. “Clothing prices eased way more than we had expected.”

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Monday’s data is likely to strengthen the case for a second sizable interest-rate cut in September. Turkish stocks rose as much as 1.1% after the news, led by banks. 

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The central bank lowered borrowing costs for the first time since March last month — from 46% to 43% —  saying data showed demand was contributing to disinflation.

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“We forecast that inflation in the remainder of the year will be supportive of rate cuts,” said Yasemin Basyigit, economist at Turkiye Ekonomi Bankasi AS. “We think the policy rate could be lowered to 34% at the end of 2025.” 

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Monetary policymakers consider realized and expected inflation as well as seasonally-adjusted prices in determining their path. They’re targeting year-end inflation of 24%, though some officials and economists have said the figure will be closer to 30%. 

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Monthly inflation saw a bump — rising to 2.1% in July from 1.4% — on the back of a series of tax increases on goods ranging from tobacco to fuel. Energy prices were also raised that month. A Bloomberg poll had indicated an increase of 2.5%. 

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Basyigit said monthly food prices — which she expected to be at 1% — came in much lower at 0.07%. 

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Despite the optimistic data, areas which monetary policymakers say are outside their influence such as housing and education continue to be a challenge. Housing prices rose 5.8% on a monthly basis, the biggest contributor to the monthly gains. 

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“Though services inflation increased because of rent, we see that it’s slowing on an annual basis,” Basyigit said. 

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Central bank Governor Fatih Karahan will present the latest inflation outlook in this year’s third quarterly meeting on August 14.

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The central bank had started rate cuts in December but paused in March in the wake of political and market turbulence prompted by the jailing of Istanbul Mayor Ekrem Imamoglu, with foreign investors dumping lira assets. To manage the fallout, the central bank raised rates and tightened financial conditions before resuming cuts in July. 

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(Updates starting in second paragraph with data, economist comments, background.)

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