Turkey’s official annual inflation rate rose for a fourth straight month in February, reaching 12.37% compared to 12.15% in January but moving up by slightly less than the market consensus forecast anticipated.

Jason Tuvey at Capital Economics said in a note to investors, entitled "Inflation rises again, but rate cuts still in play (for now)" and put out after the March 3 inflation data release, that the “further increase in Turkish inflation in February probably won’t be enough to deter the central bank from easing monetary policy a little more in the next couple of months. But policymakers have struck a more cautious tone recently and, if we’re right in expecting inflation to continue to rise and downward pressure on the lira to mount, interest rates will probably be hiked in the second half of the year”. 

The Turkish central bank has in the past eight months aggressively cut its key rate by 1,325bp from the 24% it stood at last July. Tuvey reiterated previous comments that the regulator “will ultimately bow to pressure from President [Recep Tayyip] Erdogan for interest rates to be lowered as it aims to meet the president’s target of rates in single digits”. He added that whereas the central bank expects inflation to fall by year-end, Capital sees it rising to around 15% y/y. “The lira is likely to weaken further too,” said Tuvey. “The upshot is that interest rates are likely to be hiked again later this year, reaching 12.50% by end-2020 up from 10.75% at present.”

On a month-on-month basis, which is often volatile due to seasonal effects, consumer prices rose by 0.35% in February, according to the official data from the Turkish Statistical Institute (TUIK). The consensus forecast cited by Reuters was for 0.65%.

The breakdown of the inflation data showed food inflation rebounded and housing inflation hit a 10-month high. Partially offsetting this, transport inflation eased on the back of the recent drop in oil prices. The producer price index (PPI) rose 0.48% month-on-month in February for an annual rise of 9.26%.

‘Fuelling of underlying price pressures’

“Meanwhile,” added Tuvey, “the rapid economic recovery—GDP expanded by a stronger-than-expected 1.9% q/q in Q4 2019—is fuelling a build-up of underlying price pressures. The central bank’s preferred measure of core inflation edged up for a fifth consecutive month to reach 10.0% y/y in February.”

He also noted that amid fears about the impact of the coronavirus, there were growing expectations that central banks globally would loosen policy (the US Fed on March 3 brought in an emergency rate cut of 50bp).

The embattled Erdogan administration remains intent on securing cheaper money to drive Turkey’s economic recovery in the wake of last year’s post-currency crisis recession.

But monetary easing prospects have been complicated by factors including Turkey's standoff with Russian and Syrian government forces in Syria's Idlib region and investor anxiety over the global coronavirus spread. The Turkish lira's value against the dollar has fallen by more than 4% so far this year. It declined by 36% across 2018 and 2019. The depreciation could keep inflation elevated, with imports made more expensive.

Turkey’s official economic growth leapt to 6% y/y in the fourth quarter, after three straight year-on-year contractions to mid-2019. But the trade deficit has since widened to 44% in February.

Timothy Ash at BlueBay Asset Management noted that there must “now be a reasonable chance that [Turkey’s] relations with Russia deteriorate to such an extent that Moscow” imposes a tourism and trade ban on Ankara.

Erdogan and Russian President Vladimir Putin are expected to meet to discuss the Syrian situation later this week.