Turkish inflation drops by almost 10 percentage points

The Turkish annual CPI rate tumbled in August from 61.78 to 51.97 percent. This is the second consecutive mammoth drop, mainly due to massive base effects. Inflation has plummeted by a staggering 23.5 percentage points since it reached its cyclical peak in May. Consumer prices advanced by 2.47 percent m/m, down from 3.23 percent the previous month, when an increase of administered costs such as water and electricity exacerbated the jump in the central bank's preferred measure. Today’s readings came in a tad above market consensus.

Disinflation will slow in the coming months due to fading favourable statistical effects. Nonetheless, the underlying price pressures will continue to weaken as tight monetary policy remains in place. The most recent central bank's projections show the annual CPI rate below 38 percent y/y by year-end. Although market consensus sees significantly stronger price pressures, the odds that the Central Bank of Turkey will cut rates by 500 basis points in the fourth quarter have most recently risen. Restrictive policies are finally taking their toll on domestic demand. The overheated economy is finally beginning to cool down. Turkey's GDP growth disappointed in the second quarter and weakened from 5.3 to 2.5 percent y/y. Economic activity is unlikely to regain momentum in the remainder of the year. 

Decades of ultra-loose monetary policy and overly expansive fiscal policy led to deep macroeconomic imbalances, the complete depletion of FX reserves, a loss of credibility of the CBT, and a plunge of the lira. As improvement in underlying price dynamics is already underway, policymakers are slowly winning back investors. Consequently, the policymakers are wary of threats stemming from premature easing. Over time, the reassessment of Turkish assets should translate into a revival of foreign capital inflows. Especially given the global easing cycle is gaining momentum as the Federal Reserve is set to cut interest rates later this month.

Nevertheless, fintech Conotoxia expects the Turkish currency to continue its steady, managed decline, albeit at a much slower pace than recently. Since the beginning of the quarter, the lira has depreciated by 3.5 percent against the US dollar despite a broad USD weakness. Last week, the USD/TRY pair approached the 34.50 mark for the first time in history. We see the exchange rate reaching 35.0 in the fourth quarter of 2024 as the central bank has recently intensified its efforts to limit demand for hard currency and mop up excess liquidity.