Turkey’s inflation comes in lower than expected

Turkey’s monthly inflation rate for June came in lower than expected, despite the continued collapse of the lira currency following the re-election of President Recep Tayyip Erdogan.

Turkey’s consumer price index rose 3.92% month-on-month, official data showed Wednesday. The reading was lower than Reuters’ forecast of 4.84% and compares against a 0.04% increase in May.

The largest gains were attributed to tobacco and alcoholic beverage prices, which jumped 11.13%, while restaurant and hotel prices inched up 4.31%.

On a year-on-year basis, inflation rose 38.21%, also slightly lower than Reuters’ forecasts of 39.47%.

While June was the eighth consecutive month of price growth deceleration, Conotoxia’s Market Analyst Bartosz Sawicki told CNBC that there is “little reason for optimism.”

“The lira freefall starts to take its toll once again as it reignites cost pressures,” he said. Meanwhile, BlueBay Asset Management’s Senior EM Sovereign Strategist Timothy Ash said the country could have seen even higher numbers.

“Could have been much worse given the 25% odd FX correction seen [through] post elections and worries about FX pass [through],” Ash said via an e-mailed statement.

Ash added that the central bank will need to “work very hard to bring inflation meaningfully down from here.”

Last October saw Turkey’s inflation rate soar to 85%. The Turkish lira was last trading at 26.09 against the dollar.

“With Simsek there is at least a chance of managing [through] this all without a broader systemic crisis, but there is absolutely no room for a policy error at this stage,” Ash continued.

Erdogan had named former economy chief Mehmet Simsek as his new treasury and economy minister, who was known for his market friendly policies. 

Alongside that appointment was Turkey’s new central bank governor, former Wall Street banker Hafize Gaye Erkan. 

Last month, the central bank lifted the country’s key interest rate from 8.5% to 15%, and affirmed that there will be further gradual monetary tightening until the inflation situation in the country improves.

However, the lira’s demise is not the only source of inflationary pressures, said Contoxia’s Sawicki.

“Inflation expectations refuse to grind lower in the permanently profoundly negative real interest rates and an overheated economy,” he said in an e-mail.

Turkey’s introduction of a minimum wage hike, as well a possible overhaul of tax rates which were postponed due to the elections should contribute to the return of the annual inflation rate toward the 50% mark in the second part of the year, he forecasts.