USDTRY breaches 27.5 as Turkish inflation tops 60 pct

In September, Turkish inflation accelerated from 58.94 to 61.53 pct year-on-year. The annual CPI rate rose for the third consecutive month, topping the 60 pct mark for the first time since December 2022. The print came in broadly in line with the market expectations.

Inflation in Turkey is being fuelled by a vicious mix of deeply negative real interest rates, hefty wage hikes, an overhaul of the tax system and persistent lira weakness. The recent 4.75% month-on-month jump in CPI is further exacerbated by soaring food prices and skyrocketing oil prices.

The annual CPI rate is set to remain in an upward trajectory until Q2 2024 when it will likely breach 70 pct before easing to less than 50 pct in the second half of next year. The pace of annual price increases has already exceeded the central bank's year-end forecast in July, arguing for deeper monetary tightening. In the last couple of months, the one-week repo rate was raised from 8.5 to 30 pct, and further sharp hikes amounting to even 10 pct points look inevitable in the remainder of the year. A background of re-accelerating inflation, unfavourable balance of payments dynamics, and flawed CBT credibility undermine the efforts to stabilize the lira with interventions and FX controls. A further USDTRY's jump towards the 30 mark remains Conotoxia's baseline scenario.