Turkish Inflation of Nearly 33% Could Slow Rate Cuts

Turkish inflation came in higher than expected in August, at nearly 33% annually and more than 2% on a monthly basis, readings that are likely to slow the central bank's plans to cut interest rates as it also weighs stronger economic growth.

Annual consumer price inflation stood at 32.95% last month, official data showed on Wednesday, above a Reuters poll estimate of 32.6%. It was up 2.04% on a monthly basis.

In further evidence that consumer demand remains strong despite the effects of prolonged monetary tightening, separate data on Monday had shown that Turkiye's economy grew by 4.8% in the second quarter, above expectations.

The data flurry comes at a jittery time for investors in Turkiye. A court on Tuesday ousted the Istanbul provincial head of the main opposition Republican People's Party (CHP), dealing a fresh judicial blow to opponents of President Tayyip Erdogan and triggering sharp falls in Turkish share and bond markets.

According to a poll conducted in July, economists had expected the central bank to cut its policy rate to 36% by year-end, or some 700 basis points from the current 43%. However the latest inflation and GDP data could cause it to slow the pace of the easing, analysts said.

"Looking ahead to the central bank's September 11 meeting, we expect the market's current consensus for a 300bps rate cut to moderate towards 200-250bps," Oyak Securities said in a note to clients on Wednesday.

In July, the central bank cut the policy rate by 300 basis points, relaunching an easing cycle paused in March, and it promised to use all policy tools in the event of a significant and persistent deterioration in inflation.

"After Wednesday's GDP growth data and today's inflation data, the probability of the central bank cutting rates by 300 basis points in September has become very low," Hakan Kara, a former central bank chief economist now on the faculty at Bilkent University in Ankara, said on X.

The monthly inflation reading for August of 2.04% was affected by higher food, education, and housing prices, as well as the continued impact of a mid-year update of taxes on tobacco and fuel items.

In July, CPI inflation stood at 33.52% on an annual basis, while the monthly reading was 2.06%.

In the Reuters poll, the monthly inflation rate for August had been expected to come in at 1.8%.

The domestic producer price index rose 2.48% month-on-month in August for an annual rise of 25.16%, the data showed.

Inflation is seen slowing to 30% at the end of this year according to the poll median, higher than the central bank forecast range of 25%-29%.