Turkish Lira: Policy limits keep TRY under pressure – Commerzbank

Commerzbank’s Tatha Ghose contrasts upbeat remarks from CBT governor Fatih Karahan with more cautious comments from deputy governor Gazi Ishak Kara on Turkey’s inflation dynamics. He argues that core inflation has re-accelerated, Oil prices are rising again, and with political constraints limiting further tightening, the current policy stance is inconsistent with a credible path to single-digit inflation and leaves the Lira exposed.

CBT rhetoric versus inflation data

"On Friday, Turkey’s central bank (CBT) governor, Fatih Karahan, sounded upbeat at an investor forum, describing disinflation as “on course” despite (Iran) conflict-driven delays."

"Deputy governor Gazi Ishak Kara, by contrast, sounded more cautious in his presentation on the detailed dynamics of underlying inflation. He highlighted, based on one of his graphs, that core inflation had, in fact, re-accelerated and that services pricing, especially rents, remains persistent (independently, data show that service prices are rising by 2.3%m/m seasonally-adjusted and broader prices by 1.8%-2.0%)."

"In our opinion, seasonally-adjusted core CPI is still running at faster than 2%m/m, and annualised inflation rates are clustered in the 30%-35% region. Such a pace is incompatible with a credible path towards single-digit inflation and still sits faster than CBT’s own year-end forecast trajectory."

"This dissonance between policymakers rhetoric and data matters because external conditions have turned less benign suddenly again. The oil price has shot back up, reversing part of the brief relief which had helped June’s reading. In principle, this renewed cost-push could have resurrected the demand (by the FX market) for rate hikes or extension of high rates at the minimum."

"But in practice, Karahan is already keen to discuss when rates can be brought back down – we doubt that CBT can pull the trigger to hike rates any longer without running into political limits. Even if inflation were to fail to improve any further."

"Policymakers may sound fundamentally rational when speaking, but since inflation momentum is still too fast but the policy stance cannot get tighter, the lira is likely to keep facing pressure."