May’s inflation print from Turkey kept investors’ concerns within bounds as the rate cut comments by President Erdogan on Wednesday are now less of a threat to markets with the disinflationary channel starting to become visible.
With the MoM reading printing at 0.89% vs the 1.32% expected and the YoY reading sitting at 16.59% vs the 17.25% expected, real rates continue to float in positive territory. Energy prices rose 17.7% YoY vs 18.4% previously while the core index also rose by 17% on an annual basis in May. Although strong price pressures remain, the inflation data today snaps out of a seven-month trend of consecutive acceleration.
The reaction was mild in currency markets, with the lira only falling around half a percentage point against the dollar and 0.4% against the euro. With Turkey now curtailing credit growth to improve the current account balance, one major downside risk to the lira subsides.
Turkey’s loan growth was one of the main factors weighing on the lira as it had been widening the current account deficit for some time. With the pace of loan growth now plateauing and the depreciationary pressure on the lira subsiding, the CBRT may be in a better position to cut rates going forward as it succumbs to political pressure. The June 17 decision is unlikely to contain any changes in policy as President Erdogan has given the CBRT until August to promote the disinflationary channel, however, pressure remains on the CBRT to live up to its commitment of holding real rates in positive territory while also presenting Erdogan with conciliation.
Slowing credit growth in Turkey to put a lid on pressure for TRY depreciation
Author: Ima Sammani, FX Market Analyst