Turkish Lira Struggles as Inflation Pressures Persist

Key Moments

CBT Communication Diverges From Underlying Inflation Trends

Commerzbank strategist Tatha Ghose contrasts the tone of senior officials at the Central Bank of Turkey (CBT), pointing to a notable mismatch between their public remarks and the evolution of inflation indicators.

“On Friday, Turkey’s central bank (CBT) governor, Fatih Karahan, sounded upbeat at an investor forum, describing disinflation as ‘on course’ despite (Iran) conflict-driven delays.”

According to Ghose, that optimistic stance sits uneasily alongside a more guarded assessment from another member of the CBT leadership.

“Deputy governor Gazi Ishak Kara, by contrast, sounded more cautious in his presentation on the detailed dynamics of underlying inflation. He highlighted, based on one of his graphs, that core inflation had, in fact, re-accelerated and that services pricing, especially rents, remains persistent (independently, data show that service prices are rising by 2.3% m/m seasonally-adjusted and broader prices by 1.8%-2.0%).”

Core Inflation Momentum and Annualized Rates

Ghose emphasizes that the underlying pace of price increases continues to run well above levels consistent with the CBT’s disinflation narrative.

“In our opinion, seasonally-adjusted core CPI is still running at faster than 2% m/m, and annualised inflation rates are clustered in the 30%-35% region. Such a pace is incompatible with a credible path towards single-digit inflation and still sits faster than CBT’s own year-end forecast trajectory.”

The divergence between policy messaging and these figures is presented as a key risk for investors assessing Turkey’s inflation and monetary policy outlook.

Oil Price Rebound and Market Expectations

Ghose notes that the external backdrop for Turkey has deteriorated again after a brief improvement. He argues that higher energy prices have removed some of the support that had previously helped the latest inflation reading.

“This dissonance between policymakers’ rhetoric and data matters because external conditions have turned less benign suddenly again. The oil price has shot back up, reversing part of the brief relief which had helped June’s reading. In principle, this renewed cost-push could have resurrected the demand (by the FX market) for rate hikes or extension of high rates at the minimum.”

Political Constraints and Limited Scope for Further Tightening

Despite the renewed inflationary pressure and rising oil prices, Ghose argues that the CBT is unlikely to respond with additional monetary tightening because of political limitations.

“But in practice, Karahan is already keen to discuss when rates can be brought back down – we doubt that CBT can pull the trigger to hike rates any longer without running into political limits. Even if inflation were to fail to improve any further.”

He concludes that while CBT officials may present a coherent argument in their public comments, the combination of strong inflation momentum and an inability to tighten policy further has clear implications for the currency.

“Policymakers may sound fundamentally rational when speaking, but since inflation momentum is still too fast but the policy stance cannot get tighter, the lira is likely to keep facing pressure.”