Turkey's inflation accelerates to 19.25%, real interest rates turn negative

Turkey’s annual consumer price inflation accelerated to 19.25 percent, extending the highest level since a currency crisis in 2018.

Inflation nudged up from 18.95 percent in July, exceeding the central bank’s benchmark interest rate of 19 percent, according to data published by the Turkish Statistical Institute on Friday. The uptick was fuelled by rising food, furniture and transport prices, which all increased more than 20 percent annually.

Turkey’s central bank has vowed to keep interest rates at a margin above inflation, which is the highest in major emerging markets outside of crisis-hit Argentina, saying tight policy would help slow inflation to a year-end forecast of 14.1 percent. But Governor Şahap Kavcıoğlu, who is under political pressure to cut rates, has declined to say explicitly whether he would hike borrowing costs should real interest rates, net of inflation, turn negative.

“The ball is in Kavcıoğlu’s court now,” Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London, said in e-mailed comments. “He is a bit like a Turkish oil wrestler though when it comes to pinning him down on his promise to keep real policy rates positive.”

Annual producer price inflation accelerated to 45.52 percent from 44.92 percent, the statistics institute said. The rate had hit 46.15 percent in September 2018 at the height of the currency crisis.

On a monthly basis, consumer prices rose by 1.12 percent, almost double an average forecast of 0.6 percent in a Reuters poll of economists.

The central bank has left its benchmark interest rate unchanged since March, when President Recep Tayyip Erdoğan sacked former central bank governor Naci Ağbal, who had hiked rates from 10.25 percent during his four-month tenure to control inflation. Erdoğan, who has fired three governors in just over two years, insists higher interest rates are inflationary, a view that contradicts with conventional economic theory.

The central bank next meets on interest rates on Sept. 23.

In a conference call with investors on Wednesday, Kavcıoğlu did not repeat a pledge to maintain a positive margin between interest rates and inflation, saying he expected price increases to slow in the fourth quarter of the year. Some investors may see that as a sign that the central bank would seek to avoid a hike.

Erdoğan’s call for lower interest rates pushed the lira to a record low beyond 8.8 per dollar in early June. The currency has since strengthened as investors’ appetite for emerging market currencies increased. It traded down 0.6 percent at 8.32 per dollar on Friday.

Volatility in high-risk emerging market currencies such as the lira may intensify as the U.S. Federal Reserve starts cutting its bond-buying programme, Reuters reported on Friday, citing a poll of foreign currency strategists. Most of the strategists, interviewed between Aug. 30 and Sept. 2, said recent dollar weakness would be temporary.