Turkish inflation hits 14-year high, lira slides

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Turkish consumer price inflation jumped to a 14-year high in June, official data showed on Tuesday, driving the lira down and putting pressure on the central bank to raise interest rates further this month.

Inflation rose to 15.39 percent year-on-year, the highest annual rate since 2004 after a new method of calculating price rises was introduced, and month-on-month CPI inflation leapt to 2.61 percent – nearly double the forecast in a Reuters poll.

Turkey’s Central Bank (CBRT) has raised its main policy rates by 500 basis points since April in an effort to arrest an 18 percent fall in the lira this year, despite President Tayyip Erdogan‘s opposition to higher rates. Its Monetary Policy Committee (MPC) is due to meet again on July 24.

“The market is priced for further hikes,” said Nomura Emerging Markets strategist Henrik Gullberg. “The central bank needs to break this vicious circle where currency weakness is feeding into higher inflation but then an inadequate central bank response is then feeding more currency weakness.”

“They have been reactive whereas what they need to do is be pre-emptive. They need to hike rates aggressively.”

In a Reuters poll, analysts had forecast the consumer price index (CPI) would climb 1.4 percent month-on-month. The much steeper monthly increase pushed annual inflation up 3 percentage points from 12.15 percent in May.

The rise was driven by food and non-alcoholic beverages which rose 5.98 percent on the month, and communication prices which climbed 4.76 percent, the data showed.

Core CPI inflation, which excludes volatile food and energy prices, was 14.60 percent year-on-year.

The lira, one of the worst-performing emerging market currencies which has hit record lows this year, weakened to 4.6973 against the dollar briefly from 4.6215 immediately before the data. It was at 4.6740 at 0955 GMT.

Tuesday’s inflation figures could point to a further tightening of monetary policy to raise the benchmark one-week repo rate to 20 percent from 17.75 percent, BlueBay Asset Management strategist Timothy Ash said in a note.

“No place to hide for the CBRT at the next MPC meeting on July 24. They will be expected to hike again to continue to show their hawkish credentials,” Ash said.

However investors have been concerned that Erdogan, a self-described “enemy of interest rates”, could exert pressure on the central bank to curb borrowing costs following his re-election last month to a newly empowered executive presidency.

Further increases could also worsen an economic slowdown expected later this year.

“We expect the Central Bank to maintain the tight monetary policy but do not expect further rate hikes taking into account the hard landing risk in the second half of the year,” said Is Invest economist Muammer Komurcuoglu.

“Following today’s surprise and ongoing rise in producer prices we revised up our year-end inflation estimate to 14 percent from 12 percent,” he added, saying he expected the rate to peak close to 16 percent.

Producer prices rose 3.03 percent month-on-month in June for an annual rise of 23.71 percent.

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