CBRT vows to act after Turkish inflation jumped more than expected in August

Summary:

• Turkish CPI inflation surges to highest since at least 2004

• Manufacturing PMI in August once again below “neutral” line

• CBRT declares to review its policy during meeting in September

Turkish lira found itself in the spotlight at the beginning of the new trading week. Namely, the Turkish inflation report for August was published on Monday morning and it did not paint a rosy picture for the Turkish currency. However, what one may find more interesting is the Turkish central bank announcement that came not long after data release.

The Turkish CPI inflation accelerated significantly in August. Source: Macrobond, XTB Research

The price growth in the Turkish economy once again accelerated in August. The headline CPI print showed a 2.3% MoM increase against 0.55% MoM we have seen in the previous month. On the year-over-year basis the inflation reached 17.9% YoY while in July it was 15.85% YoY. Markets expected 2.23% MoM and 17.6% YoY increase therefore one can see that the price growth actually exceeded forecasts. While in developed countries inflation reading higher-than-expected is more than desired it is not the case for the country that fails to keep price growth in check. It was the highest reading since early-2004. The energy prices subindex rose by 21.34% YoY while food prices increased by 19.75% YoY.

Apart from that, PPI inflation print was also released today. Producers’ price growth accelerated to 32.13% YoY from 25% YoY in the previous month. The difference between consumers and producers price growth pace may suggest that producers find it hard to pass higher costs onto the customers. However, such situation can continue at the cost of lower margins for some time but in case price keep rising in the months ahead producers may have no other choice than to pass it onto consumers. In such case we are likely to see CPI inflation accelerating further. Simultaneously, the manufacturing PMI index for August was released and it showed a slide from 49 pts to 46.40. Keep in mind, that this is another month when this gauge sits below 50 pts handle suggesting that the sector is contracting.

USDTRY jumped to 6.7280 following the release of the inflation report but quickly moved lower on the back of CBRT announcement. Source: xStation5

While lira took a hit following the release the bears were quickly fend off as the central bank stepped in. The Central Bank of the Republic of Turkey announced that the recent data on the inflation outlook poses a great price risk. Therefore CBRT declared to use all tools it has on its disposal and to reshape its monetary policy during upcoming September’s meeting. This means that the CBRT may be set to raise borrowing costs on September 13. However, to tame the runaway inflation the rate hike would need to be a significant one and given the CBRT announcement the market expectations are high. This poses a great downside risk for TRY in case the central bank fails to adjust its monetary settings properly. Nevertheless, we have to wait to see whether CBRT achieved a degree of independence that would allow it to act in the economy’s best interest and outside of politicians’ influence.

USDTRY trades below the last week’s high at 6.8350. The upcoming price movements of the pair will greatly depend on what CBRT will do on the September 13. Source: xStation5