Turkey’s annual inflation rate slowed to 49.4% in September 2024, down from 52% in August, according to data released by TurkStat.
This marked a significant decrease but was still higher than economists’ expectations, which had forecast a drop to 48.3%.
Despite this decline, the central bank’s preferred inflation gauge, monthly inflation, surged to 2.97%, surpassing all projections and further complicating the outlook for monetary policy decisions.
The latest data has raised concerns among investors, with many now questioning the likelihood of anticipated interest-rate cuts in the fourth quarter.
Central bank’s inflation gauge surged in September
Monthly inflation rose sharply in September, with the central bank’s key metric increasing by 2.97%.
This was higher than the 2.47% recorded in August and well above the highest forecast in a Bloomberg survey.
Education prices played a crucial role in this inflation spike, jumping by 14.2% in a single month.
This increase was driven by rising tuition fees and school bus fares, areas highlighted by the Monetary Policy Committee (MPC) in its September minutes as problematic for inflation.
Economists, including Hande Sekerci from Is Portfoy, pointed out that inflation in education, housing, clothing, and restaurant prices was much higher than expected.
Sekerci warned that inflation in services remained “sticky,” making it difficult to break the persistent rise in prices.
Goldman Sachs revises rate cut predictions
Before the latest inflation report, Goldman Sachs Group Inc. had been among the financial institutions predicting a rate cut in November.
However, the stronger-than-expected inflation print has thrown these projections into doubt.
For six months, the Turkish central bank has kept its benchmark interest rate on hold, but it softened its stance in September, leading some analysts to believe that cuts were imminent.
Sekerci and others have suggested that the rate-cut cycle could now be postponed until 2025, depending on whether inflation shows any sustained improvement.
The Turkish lira initially reversed losses against the US dollar following the release of the inflation figures, trading at 34.2051 as of 10:13 a.m. Istanbul time.
Despite this stabilisation, the lira remains under significant pressure as inflation continues to affect household and corporate price expectations.
These expectations have remained well above the central bank’s projections, further complicating the fight against inflation.
Positive real interest rates for the first time in three years
One positive development for Turkey’s central bank is that real interest rates have turned positive for the first time in three years.
With inflation falling below the central bank’s 50% key interest rate, the country’s borrowing costs are now above zero when adjusted for inflation.
This development is significant as it marks a rare moment where inflation-adjusted rates favour the central bank.
Tufan Comert, an emerging-markets strategist at BBVA in London, warned that the outlook remains challenging.
Even if inflation averages 2% over the next three months, year-end inflation is still expected to reach 44%.
According to Comert, this means that expectations for rate cuts could be pushed back to 2025.
Rate cuts delayed further as inflation risks linger
The MPC will need to tread carefully as it navigates Turkey’s inflation landscape.
With inflation still far from target levels and core price pressures remaining elevated, it seems increasingly unlikely that the central bank will move forward with rate cuts in the short term.
Governor Fatih Karahan is set to address lawmakers at the Turkish parliament later today, where he is expected to provide further insights into the central bank’s policy direction.
The recent inflation data will likely be at the top of the agenda, with many observers eager to see how the central bank plans to tackle the persistent inflationary pressures.
Outlook for inflation in Turkey
Turkey’s inflation rate remains a major concern for policymakers and investors alike.
While the annual figure has dipped below 50%, core inflationary pressures, particularly in the services sector, continue to threaten price stability.
The central bank will need to remain vigilant in its efforts to combat inflation, even as it faces pressure to lower borrowing costs to stimulate growth.
For now, the prospect of an interest-rate cut in the fourth quarter seems increasingly unlikely, with some experts pushing the timeline for monetary easing back to 2025.
Much will depend on how inflation evolves over the coming months, with particular attention on the impact of key sectors such as education, housing, and services.
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