Lira touches new low as Turkish inflation remains high

ISTANBUL: Turkey's lira slid to a new all-time low on Thursday after data showed annual inflation remained near 12% and stubbornly above the central bank's forecasts last month, raising risks for an economy emerging from a bad coronavirus slump.

The currency, which hit 7.4525 versus the dollar, has kept imports expensive and dashed hopes that lockdowns earlier this year would bring price relief. Raising the stakes for Turkey, new COVID-19 cases have jumped in recent weeks.

The month-long lira selloff stems from concerns over the central bank's depleted FX buffer, which data showed tumbled again last week. Analysts say that if selling persists, interest rate hikes may be needed despite the economic contraction.

"There are no drivers in place to bring inflation magically down to help support the lira -- the inflation-FX spiral is worsening," said Tatha Ghose, analyst at Commerzbank.

Consumer prices rose 11.77% in August, in line with the previous month and a bit less than a Reuters poll expectation of 11.91%. The monthly figure was 0.86%, the Turkish Statistical Institute said, versus 1% in the poll.

Inflation has remained firmly in double digits all year and last touched the central bank's 5% target in 2011. The bank raised its year-end forecast to 8.9% in July, betting inflation would start dipping as soon as that month.

But few analysts expect that to happen soon, and a recent Reuters poll put inflation at 11% by year end.

The largest price rises in August were in goods and services at 5.09%, while transportation, restaurants and hotels also rose. Clothing and shoe prices dropped.

The producer price index was up 2.35% month-on-month for an annual rise of 11.53%.

TIGHTENING STEPS

Turkey's economy contracted nearly 10% in the second quarter due to coronavirus lockdowns, which were lifted in June.

The central bank halted an easing cycle that month and has since held its key rate at 8.25%. To steady the lira over the last month, it has used backdoor steps to tighten credit and the average cost of funding has risen to 10.16%.

But an explicit rate hike up to inflation levels may be needed to defend the lira, especially with rising coronavirus cases threatening another economic slowdown, said Selva Demiralp, director of the Koc University-TUSIAD Economic Research Forum.

The currency has shed about 20% this year but had stabilised in recent weeks. Devaluations raise inflation via imports, which in turn swell the current account deficit.

The currency was down 0.7% at 7.4465 against the greenback at 1334 GMT.