Inflation and growth fall together in Turkey

The September inflation figures in Turkey turned out to be much better than expected. Markets were expecting a 0.70 percent Consumer Price Index (CPI) increase but it actually occurred at a much lower level, at 0.18 percent.

The annual CPI increase declined from 8 percent to 7.3 percent. 

Top of the factors we can note about September inflation is the unexpected fall in food prices, as well as the fall in core inflation, which does not include food prices. 

This fall in core inflation has inevitably boosted expectations that the Central Bank will continue to cut rates this month.   

The fall in inflation in September has happened together with a drop in economic growth. It is clear that the decline in tourism has taken 1 percent off growth this year. In addition, the unexpected fall in food prices has been very effective in the low course of inflation rates. 

It is also apparent that the recession in domestic demand caused by tourism has curbed general price increases, which in turn is reflected in inflation. What’s more, considering the long public holiday that occurred in September, we can expect that the third quarter growth rate figures will also be low. We already know that the reason why the government recently reversed its decision to limit credit card payment installments and consumer loans is that it foresees a significant fall in growth rates. 

Along with the positive effect of the slowdown in domestic demand and growth rates, the stability (in fact the decline) in foreign exchange rates in September also made a positive contribution to inflation. 

Despite the decline in growth, it is a positive development that September inflation was lower than expected. However, the criterion of success in economic management is high growth rates together with low inflation rates. That is also a criterion for economic stability.

Rate cuts and forex    

With the lower than expected inflation figures for September, markets started focusing on interest rate cuts this month. Before the inflation figures were released, there was an expectation that the Central Bank would cut rates by 0.25 points. However, when the inflation figures came out lower than expected, predictions of higher cuts by the Central Bank started to be made. 

Markets started talking about low inflation rates and low growth rates opening the path for the Central Bank to make higher rate cuts to revive the economy. 

We also saw the dollar exchange rate - which had fallen below 3 Turkish Liras - starting to climb again, exceeding 3.02 liras. 

It is indeed clear that the recent Moody’s rating cut is still influential in the exit of hot money from Turkey. However, it is also true that the rising possibility of a large rate cut is moving foreign exchange rates upwards. 

If the Central Bank was regarded as independent, this would not have constituted a problem. However, because of pressure from the government, it is not certain whether the move in foreign exchange rates will now affect the rate cut decision.