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Lira touches new low as Turkish inflation remains high

Turkey’s lira slid to a new all-time low on Thursday after data showed annual inflation remained near 12% and stubbornly above the central bank’s forecasts last month, raising risks for an economy emerging from a bad coronavirus slump.

The currency, which hit 7.438 versus the dollar, has kept import prices elevated and offset any downward price pressure from lockdowns earlier this year. Raising the states for Turkey, new COVID-19 cases have jumped in recent weeks.

Consumer prices rose 11.77% in August, in line with the previous month and a bit less than the median of 11.91% in a Reuters poll. The monthly figure was 0.86%, the Turkish Statistical Institute said, versus a poll forecast of 1%.

Inflation has remained firmly in double digits all year and last touched the central bank’s 5% target in 2011. The bank raised its year-end forecast to 8.9% in July, betting inflation would start dipping as soon as that month.

But few analysts expect that to happen soon, and a recent Reuters poll put inflation at 11% by year-end.

“There are no drivers in place to bring inflation magically down to help support the lira — the inflation-FX spiral is worsening,” said Tatha Ghose, an analyst at Commerzbank.

The largest consumer price rises in August were in goods and services at 5.09%, the data showed. Prices related to transportation, restaurants, and hotels rose, while clothing and shoe prices dropped.

The producer price index was up 2.35% month-on-month for an annual rise of 11.53%.

TIGHTENING STEPS

Turkey’s economy contracted nearly 10% in the second quarter due to coronavirus lockdowns, which were lifted in June.

The central bank halted an easing cycle that month and has since held its key rate at 8.25%. To steady the lira over the last month, it has used backdoor steps to tighten credit.

The currency <TRYTOM=D3> has shed about 20% this year but stabilized in recent weeks. Devaluations raise inflation via imports, which in turn swells the current account deficit.

The currency was down 0.6% at 7.434 against the greenback at 0935 GMT.

The backdoor steps have raised the weighted average cost of funding <CBTWACF=> to 10.16%, though a pause in recent days led some investors to suggest the tightening had come to an end.

The lira’s moves, rather than inflation, will likely determine the central bank’s next steps, said Jason Tuvey, senior economist at Capital Economics.

“If the lira’s recent stability proves short-lived — as we think likely — a further tightening of monetary conditions via the interest rate ‘corridor’ lies in store,” he said.

Reuters

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