Turkey's annual inflation hits 25% in October, highest in 15 years

The tax cuts will boost consumption temporarily, but are credit negative and risk rekindling selling pressure on the lira, said Moody's ratings agency

Turkish annual inflation surged to 25 per cent in October, official data showed on Monday, hitting its highest in 15 years and underscoring the sustained impact of a currency crisis as the wider economy loses pace.

Month-on-month, consumer prices jumped 2.67 per cent, the Turkish Statistical Institute data showed, higher than the 2.0 per cent forecast in a Reuters poll.

In the wake of a lira slide which has also stoked inflation, the government has cut its growth forecasts and economists say Turkey will record negative GDP growth this quarter and the next, discouraging any central bank move to hike rates in response to high inflation.

“I think the (central bank) would be loathe to have to increase policy rates again if the inflation data continues to disappoint as this will just make the recession deeper,” said Timothy Ash, a strategist at Blue Bay Asset Management.

“They will assume, rightly, that deflation and recession will eventually do the trick on inflation. But they need time.” The lira weakened to 5.4390 against the dollar by 03.21 pm IST from 5.43 beforehand. The currency has recently recovered some losses from a sell-off driven by concerns over central bank ability to adequately respond to rising inflation and deteriorating ties with Washington. It is still down some 30 per cent against the greenback this year.

Producer prices rose 0.91 per cent month-on-month in October for an annual rise of 45.01 per cent. Core inflation surged 24.34 annually.

October inflation was driven by a 12.74 per cent month-on-month surge in clothing and shoe prices and a 4.15 per cent rise in housing prices, the data showed.
 

Unstoppable rise

Last month, Turkey's central bank left its benchmark interest rate unchanged as it watched for the impact from a mammoth hike in September and tensions with the United States eased, helping to lira gain some ground. The bank's main rate, the one-week repo rate, currently stands at 24 per cent.

The rise in inflation in October means the central bank’s real interest rates - the level once price rises are taken into account - have been pushed further into negative territory.

Finance Minister Berat Albayrak announced a “full-fledged fight” against inflation in October, calling on all companies to offer 10-per cent discounts on items impacting inflation until year-end.

Last week, he also announced a consumer tax cut to furniture, white goods and motor vehicles, which economists say will trim year-end inflation by around 1 percent.

The tax cuts will boost consumption temporarily, but are credit negative and risk rekindling selling pressure on the lira, the Moody's ratings agency said on Monday.

“These are more short-term measures that they are introducing and I think in order to more permanently bring down inflation, the central bank needs to take a more proactive role,” said Per Hammarlund, chief emerging market strategist at SEB.