Analysts caution against Turkish rate cuts despite fall in inflation to below 11% in April

Analysts caution against Turkish rate cuts despite fall in inflation to below 11% in April
/ bne.
By bne IntelIiNews May 4, 2020

Turkish annual inflation fell below 11% in April amid growing evidence of a sharp economic downturn driven by impacts of the coronavirus (COVID-19) pandemic—analysts saw the situation as likely to tempt the central bank into further cutting interest rates, but warned that such a move would raise the pressure on the beleaguered Turkish lira, possibly paving the way to a repeat of the balance of payments crisis Turkey suffered in August 2018.

Jason Tuvey at Capital Economics said in a note to investors: “[W]e think that the scope for further easing is limited by downward pressure on the lira and expect rates to be left on hold. While the currency broke through 7/$ late last week, we doubt that official efforts to manage the currency are over. But the central bank’s firepower to defend the lira is heavily depleted and investors are unlikely to tolerate more sharp interest rate cuts. Further significant easing in the context of efforts to support the lira and high inflation would risk a repeat of the 2018 currency crisis.”

Latest official data from the Turkish Statistical Institute (TUIK) showed Turkey’s headline rate of inflation easing from 11.86% in March to 10.94% last month, in line with the consensus forecast, as the oil price collapse benefited Turkey—almost entirely reliant on imports to meet its energy needs—and coronavirus lockdowns hit demand, weighing on prices. Some Turkish manufacturers, meanwhile, suffering the worst slump since the global financial crisis more than a decade ago, have been lowering inflation by reducing prices in the push to secure orders.

Jump in CDS costs

The Turkish lira (TRY), down around 15% versus the dollar in the year to date, lost another 0.5% on May 4, taking it to 7.04 per USD. Reflecting growing risks in Turkish markets, five-year credit default swaps (CDS) costs jumped over two trading days to stand above 600 basis points.

“The weaker lira is a reason why Turkish inflation is unable to cool down quickly,” Tatha Ghose at Commerzbank was quoted as saying by Reuters.

The inflation data showed that the transportation and recreation segments, sensitive to cheap oil and Turkey’s partial lockdown, respectively, helped push down annual inflation.

Month-on-month inflation was 0.85% in April, compared with a forecast of 0.6% in a Reuters poll, partly owing to higher food and clothing prices.

The producer price index (PPI) moved up 1.28% m/m in April for an annual rise of 6.71%, the TUIK figures also showed.

The Turkish Trade Ministry, meanwhile, said imports fell 32.2% and exports 41.6% in April, according to the special trade system. That saw Turkey’s trade deficit widen 13.4% y/y to $3.4bn.

Data

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