The economic crisis in Turkey, fuelled by spiraling inflation and a plummeting exchange rate, shows no signs of slowing down. The latest inflation data for the troubled country showed September numbers surging to a fresh 15 year high at just shy of 25%.
The jump in inflation, which rose 6.3% from the prior month, was far above the market’s expectations and as put fresh focus on the severity of the currency crisis in Turkey. TRY is now down around 40% this year linked to concerns around the influence that President Erdogan has over the central bank as well as the growing tension between Erdogan and Washington following the President’s refusal to extradite a US Pastor held on terrorism charges.
Erdogan Reasserting Dominance
Following an attempted Coup in 2016, President Erdogan has reasserted his dominance in Turkey and his opposition to rate increases has been made clear. However, many question whether Erdogan is exerting an inappropriate influence over the central bank which is supposed to be politically neutral and free from government influence.
The combination of these elements has led to elevated levels of investor uncertainty causing significant capital outflow from the country with TRY now down by almost 50% against the US Dollar since 2016.
Devil’s In The Details
The breakdown of the data makes for eye-watering reading with the cost of basic living, such as food and health costs, shooting up by 27.7% and 14.7% respectively. These were not even the most significant increases which were seen in furnishings and household items, both up by over 33%. In all, 6 of the 13 CPI components rose more than 20% in September as Turkish CPI remained in double digits for the seventh consecutive month.
Turkey’s heavy reliance on importance oil has also contributed to the downfall of the Lira given the sharp rise in oil prices this year (priced in USD) which has taken a heavy toll on both business and private consumers alike.
Further CBRT Action Expected
With the crisis showing no sign of abating, the market is heavily expectant of further central bank action at the upcoming CBRT meeting on October 25th. The bank raised rates unexpectedly from 17.75% to 24% (for the one-week repo rate). Given that such a drastic rate hike has failed to fuel a reversal in USDTRY, many are questioning how much else the CBRT do.
USDTRY remains hemmed in a tight descending triangle pattern for now following the sell-off from earlier summer highs. Ahead of the CBRT meeting later in the month the range is expected to persist though the focus remains on a break higher.