Annual inflation in Turkey fell to 10.94 percent in April as oil remained cheap and the coronavirus pandemic hit economic activity, while separate data showed manufacturing and trade plunged in April, Reuters reported.
Measures adopted to contain the pandemic are expected to tip Turkey’s economy into a mid-year recession, pushing inflation lower in the coming months and clearing the way for the central bank to extend an aggressive easing cycle.
Yet a nearly 15 percent drop this year in the Turkish lira is curbing that downward momentum in prices and propelling a sharp recent drop in the central bank’s buffer of FX reserves, analysts say.
Turkey is almost entirely dependent on imports to meet its energy needs, and the recent plunge in oil prices had already pushed annual inflation down to 11.86 percent in March after four consecutive months of rises.
Transportation and recreation gauges — which are sensitive to cheap oil and Turkey’s partial lockdown, respectively — nudged down the year-on-year measure of consumer prices, the Turkish Statistical Institute (TurkStat) said.
Month-on-month inflation rose 0.85 percent in April, a bit more than a Reuters poll forecast of a 0.6 percent rise, due in part to increases in clothing and food prices.
After the data were released, the lira was 0.2 percent weaker at 7.02 against the dollar. Reflecting rising risks in Turkish markets, five-year credit default swaps jumped in the last two trading days and stood above 600 basis points.
“The weaker lira is a reason why Turkish inflation is unable to cool down quickly,” said Tatha Ghose at Commerzbank.
“The inflation rate needs to now decline swiftly in order to justify the central bank’s actions and restore a positive real interest rate. But progress is slow, which is multiplying the risks.”
The poll forecast annual inflation would fall to 10.88 percent in April and would stand at 9.6 percent at year-end.
Inflation hit a 15-year high in October 2018, when it topped 25 percent after a currency crisis that sliced 30 percent off the value of the lira.
The producer price index rose 1.28 percent month-on-month in April for an annual rise of 6.71 percent, the data showed.
Tourism, spending, trade and manufacturing are expected to slump into the summer due to Turkey’s battle against the new coronavirus, which has killed nearly 3,400 in the country.
Among manufacturers, output and new orders contracted at unprecedented rates last month with the Purchasing Managers’ Index falling to levels not seen since the global financial crisis in 2008.
The Trade Ministry said imports fell 32.2 percent, while exports dropped 41.6 percent in April, according to the special trade system, which saw Turkey’s trade deficit widen 13.4 percent year-on-year to $3.4 billion.
Finance Minister Berat Albayrak was quoted as saying he expected the economy to grow in 2020 despite the temporary slowdown.
He said Turkey was having talks with trade partners about securing a swap line but added that the central bank’s reserves were adequate to meet short-term needs and highlighted its gross reserves, which stood at $53 billion as of April 24.
The central bank’s net FX reserves have dropped to around $25 billion from $40 billion in January in part because it has funded, via swaps, unorthodox efforts by state banks to stabilize the lira, analysts say.
Ghose of Commerzbank said the currency’s drop through 7 versus the dollar “highlights the ongoing tussle between policymakers, state-owned banks and bears, which has reportedly been draining dollar supply and depleting the central bank’s FX reserves.
“At some point, the balance of forces may shift abruptly, leading to a sharp swing – this is what we must watch out for,” he said.