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Incoming data proves strong contraction as the central bank hikes inflation forecast radically!

As the Governor claims the slowdown in Q218 continues in Q318 referring to the “improvement in the current account” as a proof for economic rebalancing; what is happening in the Turkish economy is much more than “rebalancing”.

Incoming data proves strong contraction as the central bank hikes inflation forecast radically!

Turkey’s central bank has for the fourth time this year sharply raised its end-year CPI inflation forecast to 23.5%. The outlook, given in bank’s fourth and final Inflation Report for 2018, moves the estimate up from the previous 13.4% predicted in the July inflation report as made public by the central bank governor Murat Cetinkaya on October 31st.

The central bank said in its new report that there was a 70% probability that inflation would be between 21.9% and 25.1% (with a mid-point of 23.5%) at end-2018.

The central bank also radically hiked its food inflation estimate for 2018, moving it up to 29.5% from the July forecast of 13%, while its average oil price estimate was revised up to $75 per barrel from $73.

While the main question is minds is the October inflation reading; whether it could surpass the September level of 24.52%, Cetinkaya only said that Turkey’s inflation might be volatile in the short term; betting on economic contraction to take its toll and lower inflation down in the months ahead.

In fact the September foreign trade data released the same morning that showed the trade deficit contract by 77% y/y to USD1.87bn (following the August contraction of 59% y/y) happens to be the lowest deficit level seen since 2009; confirming the deep economic contraction. Moreover, a separate  data release showed Turkey’s economic confidence index fell further by 5% m/m to 67.5 in October which is the lowest level seen since January 2009.

As the Governor claims the slowdown in Q218 continues in Q318 referring to the “improvement in the current account” as a proof for economic rebalancing; what is happening in the Turkish economy is much more than “rebalancing”.  To name it-again- the currency crisis of 2018 is taking its toll on the Turkish economy as a major economic shock and economy has long turned into a strong contraction phase which is way sharper than calling it “rebalancing”.

October inflation critical; but not the only critical inflation reading

With the incoming data flow, the central bank revisions to inflation expectations and later in the day tax cuts intruded; markets remain focused on the October CPI data release to be announced by TUIK on November 5.  Note that Turkey’s central bank on October 25 had kept the policy rate at 24%.

There seems to be no clarity on what to expect as the October inflation print given the recovery in lira, the government’s recently announced “call” for the private sector to voluntarily cut prices by 10% for two months and the dismissal of the deputy statistic office director responsible on inflation releases.

Currently, Turkey’s annual producer price index (PPI) is 46.15% as of September which is the highest level seen since 2002, elevating worries on further pass through.

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