Turkey annual inflation seen at 32.5% in September, monthly rate 2.6%

Turkey's monthly inflation is forecast to increase to 2.6% in September, primarily due to education and food price surges, though the annual rate is projected to slightly decrease to 32.5%, according to a Reuters poll. With year-end inflation still expected at 30%—above the central bank's 24% target—analysts like Morgan Stanley anticipate the central bank may moderate its easing cycle, potentially reducing its next rate cut to 200 basis points from 250 basis points, bringing the policy rate to 38.50% amid persistent inflationary pressures.

Analysis

A Reuters poll indicates a challenging inflation outlook for Turkey, with the monthly rate forecast to accelerate to 2.6% in September due to price hikes in education and food, even as the annual rate is seen moderating slightly to 32.5%. The persistent inflationary pressure is underscored by the year-end median forecast of 30%, which remains significantly above the central bank's 24% target, highlighting a potential credibility gap. In this environment, the Central Bank of the Republic of Turkey (CBRT) is expected to continue its easing cycle, but at a reduced pace. Morgan Stanley projects the next rate cut will be 200 basis points, a slowdown from the 250 basis points in the prior meeting, which would bring the policy rate to 38.50%. This potential moderation signals a more cautious policy stance in response to stubborn inflation and is a key data point for markets, particularly given the backdrop of heightened political risk which has previously driven the lira to record lows.

Key Decisions for Investors

• Investors should closely watch the upcoming Turkish Statistical Institute inflation release on October 3, as an upside surprise could pressure the central bank to alter its easing path, creating volatility in the lira and local equities.
• The next CBRT policy meeting is a key catalyst; a rate cut smaller than the previous 250 basis points, as forecasted, would signal a more hawkish shift and could temper negative sentiment on Turkish assets, while a larger cut would amplify concerns about the policy response to inflation.
• Given the combination of persistent high inflation, unorthodox monetary policy, and underlying political risk, it is prudent to consider hedging Turkish lira exposure or maintaining an underweight position on Turkish assets until there is greater clarity on the inflation trajectory and policy response.