Exchange rate and monetary policy effects to be monitored in inflation

Consumer prices in showed an increase of 0.86% in August, while annual inflation was realized as 11.8%. (Tera Yatırım)

Consumer prices in showed an increase of 0.86% in August, while annual inflation was realized as 11.8%. Economists who participated in the Bloomberg survey expected an inflation rate of 0.95% on a monthly basis and 11.86% annually. Our expectation was for 1% monthly and 11.9% annual realization. In this respect, we see that the data received are slightly below the high expectations in general. We expect TRY which lost value to record levels in a period followed Turkey’s economic stimulus policies, and the Central Bank's policy of increasing funding cost for tightening to be effective on inflation.


If we look at the sub-items of inflation; We see that the items that show a decrease in prices on a monthly basis are clothing and shoes, food and non-alcoholic beverages, which have a very strong seasonal effect. There is a monthly decrease of 2.11% in clothing, which we see very high increases and decreases with the seasonal effect. We also observe a 0.08% decrease in the food item, which is normal to decrease in this period of the year. Annual food inflation, on the other hand, continues to increase, rising to 13.5%, and above the year-end remains Central Bank target. The items that made the most upward contribution to inflation were respectively; Miscellaneous goods and services increased by 5.09%, transportation and restaurants and hotels with 1.56%. Increases are also observed in other items such as household goods, housing, communication, entertainment and health. While the increase in services inflation, restaurants and hotels and health can be explained by the pandemic effect, the increase in automotive prices and gasoline prices seems to have pulled the transportation group up. Annual inflation in the energy group was at 9.6%, above the July level.


Although the effects of the increase in interest rates due to the tighter monetary policies will suppress demand in the upcoming period, we think that the main impact on inflation will be from the cost channel. In this respect, the effects of the cost from the recent increase in exchange rates on final prices may have a reflection that will increase inflation. We see this cost effect on the PPI side. The increase of 2.35% in PPI on a monthly basis may cause high CPI increases in the following months by reflecting these costs to product prices. In this case, we can see the effect of inflationary pressures of the increase in groups with high foreign exchange sensitivity such as automotive, energy, basic goods and services. Core inflation to which the Central Bank refers is also on the rise. We expect B and C indicators, which have reached 11.2% and 11% respectively, to continue to rise with the increase of basic cost pressures.


The Central Bank increases the funding cost by controlling the market liquidity rather than an official rate hike or interest rate corridor technical adjustment in monetary policy against the increasing TRY depreciation. It seems possible that WACF, which was at the level of 10.16% as of September 2nd, could be increased towards LLW at 11.25%. The effect of tightening steps in monetary policy on the TRY is important in terms of the course of inflation in the upcoming period, especially the cost effect due to exchange rate pass-through. If the CBRT's side policy steps do not have direct effects on TRY, inflationary pressures may remain high. This situation paves the way for inflation to remain in double digits until the end of the year. While the 2020 and 2021 expectations in the Inflation Report were 8.9% and 6.2%, respectively; The average expectations of market players and real sector representatives in the CBRT Expectations Survey were 10.8% for the year-end and 9.7% for the next 12 months. The Central Bank will hold its next MPC meeting on September 24th.


Kaynak Tera Yatırım
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