Higher-than-Expected September Inflation Delays Turkey’s Anticipated Interest Rate Cuts

Turkey's annual inflation rate dropped to 49.38% in September, but a higher-than-expected monthly increase of nearly 3% has dampened expectations for early interest rate cuts. Analysts now predict the central bank may not begin easing monetary policy until January 2024.

Turkey’s Central Bank Delays Rate Cuts as September Inflation Surges, Exceeding Expectations

In September, Turkey's annual inflation rate decreased to 49.38%. However, the central bank exercised caution and dampened expectations for early interest rate decreases due to a monthly increase of nearly 3%, significantly higher than anticipated.

The Central Bank of the Republic of Turkey (CBRT) has achieved a significant milestone in its aggressive tightening cycle. Its policy rate has now surpassed the annual consumer price index (CPI) at 50% for the first time since 2021. This move is intended to mitigate high prices.

However, CBRT Governor Fatih Karahan stated that there is still "some distance to cover" before the bank's two primary inflation objectives are achieved, following the unexpectedly high price measures last month, partially driven by education-related expenses.

Karahan stated in his Parliamentary address on October 3 following the data's publication that the two conditions were the convergence of expectations to the bank's forecast range and a substantial and permanent decline in the monthly primary trend.

He emphasized that the upward risks were evident and that September inflation was significantly higher than the bank's expectations.

Analysts Predict Turkey's Interest Rate Cuts Unlikely Before January as Inflation Remains High

According to confident analysts, it was improbable that the bank could relax its policy sooner than December and potentially only in the following year.

Goldman Sachs, a Wall Street bank, announced on October 4 that it anticipates the Central Bank of Rwanda (CBRT) reducing interest rates in January, as opposed to its previous prediction of November.

The bank stated that sequence inflation is "significantly higher than the threshold we believe is required" for the bank to begin reducing rates.

"Lack of a slowdown in inflation and the continued erosion of households' purchasing power also raises the possibility of a higher minimum wage increase in December and adds to upside risks to inflation for next year."

Another Wall Street bank, JPMorgan, also anticipated that easing would commence in January, following its previous prediction of November. According to Capital Economics, it is exceedingly unlikely that rates will be reduced this year.

The Turkish Statistical Institute (TurkStat) reported a month-over-month inflation rate of 2.97%, which exceeded the 2.2% forecast in a Reuters poll. Additionally, the annual consumer price index (CPI) exceeded the poll's projection of 48.3%.

The annual rate of the Consumer Price Index (CPI) was 51.97%, with a monthly rate of 2.47% in August. The central bank is closely monitoring the monthly rate to determine when to commence easing, even though it has only fallen below 2% once this year, in June.

A Reuters poll conducted last month revealed a dwindling number of analysts anticipated a first reduction next year. The consensus was reached around November, and it was expected that at least 20 points of easing would be implemented by the end of 2025.

Additional hawkish changes may occur.

According to Haluk Bürümcekçi, the founding partner of Bürümcekçi Consulting, a reduction is unlikely. "It may not be sufficient" for a November reduction, he stated, even if October inflation is consistent with the central bank's guidance.

Turkey’s Inflation Surges in September, Driven by Soaring Housing and Education Costs, Despite Stabilized Rates

According to the data (via Daily Sabah), the domestic producer price index increased by 1.37% month over month in September, resulting in an annual increase of 33.09%.

In September, annual inflation was boosted by a 97.9% increase in housing prices, while education prices rose by 93.59%. The prices of the primary food items and nonalcoholic beverages increased by 43.72%, which is lower than the overall level.

The central bank maintained rates at 50% for the sixth month last month, stating that it closely monitored inflation risks. However, it eliminated a reference to potential tightening, which was perceived as a preliminary indication that easing would occur.

Karahan declared in a presentation to the Planning and Budget Commission of Parliament that the central bank would remain resolute in its posture until price stability is achieved.

He stated that the central bank's prediction of the disinflation process has been realized, and macroeconomic indicators are consistent with this trend.

According to data released by a separate central bank last week, in September, households' expectation of annual inflation 12 months in advance was 71.6%, significantly higher than the market's estimate of 27.5%.

The bank anticipates that inflation will decrease to 38% by the end of the year and 14% in the following year, following a 4,150-basis point increase in rates since June of last year. After this year, the government anticipates inflation to reach 41.5%.

On October 4, Goldman Sachs increased its year-end inflation forecast from 40% to 44%.