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Turkish Price Slowdown Resumes to Set Stage for More Rate Cuts

Cagan Koc
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Turkish Price Slowdown Resumes to Set Stage for More Rate Cuts

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The pieces are falling into place for Turkey’s central bank to follow its record interest-rate cut with more monetary easing as inflation heads for lows not seen since last year’s currency crash.

A more stable lira and the effect of a high base of comparison could push price growth into single digits as early as this month. Data on Tuesday showed it decelerated more than forecast in August to an annual 15%, the slowest in more than a year.

Turkey’s currency reversed losses after the data release and traded 0.3% stronger against the dollar as of 10:47 a.m. in Istanbul.

Prodded by President Recep Tayyip Erdogan and encouraged by the dovish swing among global policy makers, Turkish central bank Governor Murat Uysal could press ahead with easing as disinflation resumes following a blip in July. The deceleration is set to continue as the statistical effect of last year’s price spike fades.

“Unless the lira weakens markedly, the central bank will continue to cut rates to ease the burden on the economy,” said Piotr Matys, a London-based strategist at Rabobank. “It remains to be seen whether the fall in inflation leads to an improvement in expectations amongst households and corporates.”

Uysal had only been in office a few weeks when he slashed the benchmark by 425 basis points to 19.75%, the biggest rate cut in at least 17 years. His predecessor was fired for not cutting rates quickly enough.

The new governor signaled that more cuts were on the cards but also vowed to preserve “a reasonable rate of real return” for investors. Adjusted for prices, Turkey’s real rate is now at 4.7%, above peers such as South Africa, Russia and South Korea.

Most of the monthly inflation increase in August was a result of hikes in the cost of tobacco and natural gas, Okan Ertem, a senior economist at Turk Ekonomi Bankasi, said before the data release. Without those “regulatory interventions,” the consumer-price index rose only by around 0.3% from July, according to Ertem, who says the annual gauge may be below 10% in September and October.

“Inflation is heading lower and is likely to move quite quickly over the coming months,” said Nigel Rendell, a London-based senior analyst at Medley Global Advisors. What’s more, “Erdogan wants lower interest rates -- and what the president wants, he tends to get.”

(Updates with lira performance in third paragraph.)

--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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