For the release of Turkish CPI data for September, markets expected to register 32.5%y/y inflation (which would translate to 2.5% month-on-month, after seasonally-adjustment).' The outcome on the day surprised noticeably to the upside, with the month-on-month increase working out to 3.1%m/m instead of the 2.5%. That is a big difference, Commerzbank's FX analyst Tatha Ghose notes.

CBT is not likely to stop cutting rates

"We would argue that known one-off factors – such as the 30% Istanbul fare hike, which impacted the transportation component for September – ought to have been incorporated by polled analysts, who follow these kinds of things. Policymakers had forewarned about the various reasons why inflation could re-accelerate in coming months. We also find that services and other core categories contributed significantly to the re-acceleration – this was not all about one-off food or utility price hikes. The lira is depreciating at an annualised 40% rate on a basket basis (50% USD, 50% EUR), which puts a limit on disinflation."

"What does the development imply for the central bank’s (CBT’s) rate cuts? Not much, we reckon. We view the recent rate cuts as politically-motivated. Maybe not in the old sense where President Tayyip Erdogan exerts direct pressure and fires the central bank chief. But in the sense that the economic policy team probably senses that the conventional policy experiment has now gone on for far too long – that it may be unrealistic to presume “open-ended patience” from the president."

"Hence, we do not think that CBT will stop cutting rates. Perhaps the pace could slow down to 100-150bp from the last 250bp, but it could be difficult to reverse course or try additional things to comprehensively slow the economy down (this is what has been missing all this while – and now it may be too late to attempt this). CBT could resort to secondary policy tools instead, which will not work to control inflation. In fact, that would make things identical to the work of previous MPC’s. In conclusion, the lira could be poised to face increased volatility."