Untamed Inflation to Test Resolve of Turkish Central Bank Chief
(Bloomberg) -- Turkey’s central bank governor will unveil fresh inflation forecasts on Friday, following data signaling that price rises of almost 50% annually are not slowing as quickly officials hoped.
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Analysts have been quick to change their forecasts for interest rate cuts, with many now doubting they can begin this year.
The central bank is more optimistic. Earlier this week, it said annual inflation numbers don’t accurately show the progress being made and that seasonally-adjusted prices offer a “clearer picture.”
The year-on-year inflation rate dropped less than expected in October, to 48.6% from 49.4% a month earlier. Yet when adjusted for seasonal effects, both monthly inflation and monthly core inflation — which strips out volatile items such as energy and food — decelerated more significantly.
Governor Fatih Karahan will shed more light on the central bank’s outlook when he presents a quarterly inflation report in Ankara. He’ll also take questions from economists and journalists.
Karahan will probably outline “a cautious approach” to rate cuts, according to Morgan Stanley economist Hande Kucuk.
“Seasonally adjusted trends have remained above the central bank’s guidance,” she said in a note to clients, adding that the first rate cut is likely to be in January.
Turkey’s held its key rate at 50% — one of the highest levels in the world — since March. That’s helped slow inflation from more than 75% in May, but has also weakened the economy. The Monetary Policy Committee’s next meetings are on Nov. 21 and Dec. 26.
Central bank officials have projected inflation will decelerate to 38% by the end of the year, with the upper range of that forecast at 42%. The current trajectory suggests prices will be slightly above that higher level.
Investors and analysts will also pay attention to Karahan’s inflation forecast for the end of next year, currently at 14%, to gauge the course of monetary policy. The likes of Morgan Stanley and Deutsche Bank AG see price growth being about 10 percentage points higher than that.
The outlook is riddled with other uncertainties. Turkey’s minimum-wage raise for 2025 will be a key determinant of inflation. Abroad, Donald Trump’s victory in the US presidential election and the extent of the Federal Reserve’s rate cuts will also impact Turkey. The Fed is expected to cut rates by 25 basis points later on Thursday.
So far, Turkish government officials have sought a minimum wage raise that’s aligned with the central bank’s outlook, meaning a hike of 30% or less.
The number, however, will be subject to President Recep Tayyip Erdogan’s approval. It’s expected to be announced in December. For 2024, Erdogan’s government raised the minimum wage by 49%.
“Back-to-back upside surprises in inflation for the last two months lower the likelihood of a cut in 2024,” said Deutsche Bank analysts Yigit Onay and Christian Wietoska. They will watch closely for updates from Karahan “on the central bank’s reaction function in light of persistent inflation and the slowing economy,” they said.
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