Tatha Ghose at Commerzbank reports Turkey’s September Consumer Price Index (CPI) fell below 30% year-on-year, with softer month-on-month gains, creating scope for the central bank to cut rates by 100 bps. He warns the Lira remains heavily managed by official intervention and cannot benefit sustainably. A rate cut and possible re-acceleration of inflation later this year are expected to keep Turkish Lira (TRY) under pressure.

Lira support undermined by easing risks

“Turkey’s September CPI data surprised pleasantly: headline inflation fell to 29.7%y/y from 31.51%y/y, while prices increased by 1.8%m/m – softer than consensus forecasts had implied. Core C inflation moderated to 28.7%y/y, but the index still rose by 2.1%m/m. As usual, we do not attach much significance to the year-on-year decline, which was heavily flattered by base-effects, but there is no question that month-on-month rate of increase (after seasonal adjustment) also decelerated noticeably”

“Nevertheless, this data point creates the perfect background for Turkey’s central bank (CBT) to cut rates by 100bp later this month. Inflation has dropped below 30%y/y for the first time in almost five years, allowing policymakers to implement what they had desperately been seeking.”

“The lira was unable to benefit from the better data yesterday because it is anyway propped up by central bank and state bank intervention. Such intervention can smooth the path, but cannot alter the direction. A rate cut and potentially re-accelerating inflation later this year will keep the exchange rate under pressure, in our view.”