Turkey’s consumer inflation falls sharply to single digits

(Updates with analyst comments)

Turkish inflation fell sharply to 9.26 percent in September after slowing to 15 percent in August, the Turkish Statistical Institute said on Tuesday, leading to predictions that the central bank could reduce interest rates.

Treasury and Finance Minister Berat Albayrak predicted the fall in an op-ed for Bloomberg on Monday and said the decline could be attributed to factors including fiscal and monetary actions coordinated by the central bank and government, containing food price inflation and voluntary price-cutting by the private sector.

A new economic programme unveiled by the minister on Monday revised the estimate for 2019 inflation down to 12 percent, from 15.9 percent. Consumer price inflation fell from a high of 25.2 percent a year ago, to 15 percent in August. 

Meanwhile, the producer price index slowed to 2.45 percent in September from 13.45 percent in August. PPI reached a peak in September last year of 46.15 percent. 

Following a currency crises in August 2018, triggered by a diplomatic row with the United States, the Turkish government has tried to curb rising prices to help reinvigorate consumer spending and encourage banks to reduce interest rates on loans. 

Tim Ash of London-based hedge fund Blue Bay Asset Management said on Twitter that the collapse in inflation would likely be followed by new central bank rate cuts. 

The central bank lowered its one-week lending rate by 325 basis points to 16.5 percent on Sept. 12, after decreasing its borrowing costs by 425 basis points in July. 

President Recep Tayyip Erdoğan, who supports the unorthodox view that lower interest rates reduce inflation, said before the central bank’s latest move that Turkey would cut rates and slow inflation to single digits in a short time.

“The gap between the policy rate at 16.5 percent currently and a single-digit inflation rate will most probably attract the president’s attention,” İnan Demir, an economist at Nomura International in London, told Bloomberg after the latest inflation data was announced. 

Bloomberg economist Ziad Daoud said the fall in inflation was the result of strong base effects linked to the lira. “The currency effect will slow price growth further in October before turning inflationary later this year, limiting the central bank’s room to ease policy,” he said.