Monex: Goed nieuws kan slecht uitpakken voor Turkse lira

October 3, 2019

Hieronder volgt een commentaar in het Engels van Simon Harvey, valuta-analist bij Monex Europe, op de afzwakkende inflatie in Turkije.

More good news could soon spell bad news for the lira as a storm is seemingly on the horizon

Turkey’s headline inflation fell from 15.01% in August to 9.26% in September, but the majority of the decline was driven by base effects. In September 2018, following the lira’s spike above 7.00 in August, inflation rose 6.3% MoM and 24.52% YoY. Due to this data point being used as a base to measure annualised inflation, the headline figure dipped into single digits for the first time since July 2017. The MoM figure of today’s release, which measure a 0.99% increase in consumer prices is more telling of the underlying inflation trajectory.

 0.99% marks a slight increase from August’s 0.86% reading, but continues the trend of consumer prices rising around the 1% mark each month this year. This runs in line with Treasury and Finance Minister Berat Albayrak’s projection that inflation will end 2019 at around 12%, but we hold a less optimistic view. Monetary policy is arguably coming close to its limit, with roughly 350bps left of cuts in 2019 in our view, and will undoubtedly become a political focus again given the 5.0% growth target set for 2020. Investors in the lira remain cautious, highlighted in today’s tentative rally.  and even though the incoming data is supportive of a rally in the currency back towards pre-crisis levels the risks are still apparent. Should the deflationary trend continue, it will only embolden President Erdogan and his neo-Fisherite view on low interest rates driving low inflation levels. Such a view hasn’t gone down well in FX markets in the past and all it takes is one headline from Erdogan on interest rates for memories of 2018 to re-emerge. A stable inflation rate is pivotal for the deflationary trend to continue and a sharp sell-off could quickly unwind any progress Governor Uysal has achieved thus far.

Chart 1: Base effects drive the headline inflation figure into single digits for the first time in 2-years

Chart 2: the lira rally is limp this morning as fears around the politicisation of monetary policy are plentiful