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New Rift Over Rates Brews in Turkey as Inflation Slows Below 10%

Cagan Koc
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New Rift Over Rates Brews in Turkey as Inflation Slows Below 10%

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Turkish inflation slowed sharply into single digits, possibly setting up another confrontation with President Recep Tayyip Erdogan after his new central banker hinted at limited room for more monetary easing.

Thanks to a more stable lira, weak demand after recession, and the fading effect of last year’s price spike, inflation decelerated more than forecast last month to the lowest level in over two and a half years. It dropped to an annual 9.3% from 15% in August, according to data released by Turkstat on Thursday. That makes Turkey’s real interest rate among the highest in emerging markets.

“The big challenge here will be to manage the political aspects of this,” said Inan Demir, an economist at Nomura International Plc in London. “The gap between the policy rate at 16.5% currently and a single-digit inflation rate will most probably attract the president’s attention.”

The good news could turn into a headache for Governor Murat Uysal, whose predecessor was fired for not cutting rates fast enough. Although Erdogan remains fixated on lower borrowing costs, which he believes would only curb inflation, Uysal signaled this month that the central bank might look to moderate its pace of rate cuts after “front-loaded” monetary easing in July and September.

On his watch, the central bank has cut rates by 750 basis points, including a record move in his first month on the job.

Policy makers next meet to review rates on Oct. 24, followed by their quarterly inflation report a week later that includes updated forecasts. The government predicts that inflation will end this year at 12%, while the central bank’s current base-case scenario is for 13.9%.

Given the path of inflation, a rate decrease of 150 basis points was already likely in October, said Julian Rimmer, a trader at Investec Bank Plc in London. But now that “could be thought conservative,” he said.

Similarly to the previous two decisions, policy makers may exceed the current market expectation by about half a percentage point, delivering a cut of 150 to 200 basis points this month, according to VTB Capital.

“The positive inflation trend and supportive global interest-rate environment give the central bank further room to cut rates,” said Akin Tuzun, an analyst at VTB Capital. “Confirmation of single-digit year-on-year inflation is likely to be welcomed by the market.”

(Updates with new Bloomberg economist quote.)

--With assistance from Harumi Ichikura.

To contact the reporter on this story: Cagan Koc in Istanbul at ckoc2@bloomberg.net

To contact the editors responsible for this story: Onur Ant at oant@bloomberg.net, ;Lin Noueihed at lnoueihed@bloomberg.net, Paul Abelsky

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