(Bloomberg) -- Turkey’s annual inflation likely dropped below the central bank’s 50% key interest rate in September, in what would be the first time in three years that official borrowing costs are above zero when adjusted for prices.
Data due Thursday will show consumer inflation slowed to 48.3% last month from 52% in August, according to the median forecast of economists surveyed by Bloomberg. Monthly inflation, the central bank’s preferred measure, reached 2.2% from 2.5% in August, a separate poll found.
Positive real rates would be a milestone in the pursuit of policy normalization by officials who were put in charge of Turkey’s economy last year. Inflation-adjusted borrowing costs below zero encouraged spending and investment by driving down the returns on cash, locking Turkey into a cycle of price increases and currency depreciation that unsettled its economy.
The Monetary Policy Committee has kept its benchmark on hold for the last six months but softened its stance in September. With the policy rate minus realized inflation set to turn positive, Turkey’s shift to a looser bias probably means the first rate cut is soon approaching.
Bank of America Corp. economist Zumrut Imamoglu said officials could start lowering borrowing costs in December, while other global banks like Goldman Sachs Group Inc. see it happening a month earlier.
Even so, the central bank’s path to rate cuts is far from clear.
In the minutes of its last meeting in September, the MPC drew attention to the high services inflation stemming from university tuition fees and an increase in school bus fares.
The monthly reading will not be “where the central bank guides it to be,” with services inflation yet to slow down, according to Imamoglu. “Sticky services inflation and still elevated food prices” pose risks to officials’ year-end inflation target of 38%, she said in a research note.
What Bloomberg Economics Says...
“Price gains dipping below the 50% policy rate add pressure on the central bank to kick off an easing cycle at the October policy meeting. However, we expect criteria on inflation expectations and momentum to give policymakers the cover they need to hold on until November before taking a first step lower.”
— Selva Bahar Baziki, economist. Click here to read more.
The trajectory of monthly inflation has also gained more prominence for investors who are increasingly expecting the central bank to start cutting borrowing costs in the fourth quarter. Monthly price growth in Turkey’s largest city Istanbul came in at 3.9% in September, compared with 1.7% in August.
Turkey Seen Likely to Start Discussing Rate Cuts in November
Household and corporate price expectations — another key indicator for policymakers — have remained far more elevated than projected by the central bank, which sees them as a risk to disinflation.
Analysts at HSBC Holdings Plc said the central bank could hold off on easing until next year, citing the need for a prolonged period of tight monetary policy to anchor inflation expectations. Governor Fatih Karahan is due to present the year’s last quarterly inflation report on Nov. 8.
Turkey has for years maintained one of the world’s most negative real rates. September marked the third anniversary of an unexpected rate cut delivered under pressure from President Recep Tayyip Erdogan, which unleashed major market turbulence at the time and spurred a cost-of-living crisis.
“The real policy rate should remain firmly in positive territory, based on our inflation forecasts,” HSBC’s analysts said, seeing inflation at 28% and the benchmark at 30% at the end of 2025.
--With assistance from Joel Rinneby.
©2024 Bloomberg L.P.
