Turkey: Inflation outlook risks continue to slope upwards

Turkey’s consumer prices showed an increase of 1.25% in December, while annual inflation was realized as 14.6%.

Our expectation was for a monthly inflation of 0.90% and annual inflation of 14.2%. We see that the reflection of the effects of the exchange rate increase from the past on the prices and the increases in the commodity and energy group increased the inflation more than expected.


If we look at the sub-items of inflation; Many of the main expenditure groups have increased. The exchange rate pass-through is clearly visible in the core inflation view, and the C indicator, which excludes volatile items such as food, energy and gold, showed a sharp rise from 13.26% in November to 14.31% in December on an annual basis. Among the items that increased higher than the headline inflation, household goods stood out with 3.46%, transportation with 2.64% and food with 2.53%. The recovery observed in global oil prices in the last quarter of the year accelerates energy inflation from 4.3% to 5.6%, explaining the price increases in the transportation group. Food inflation, which was 21.1% in November, slowed down to 20.6% year-on-year in December, but the increase in food underlies inflationary risks, together with both the volatility in price increases on a monthly basis and drought risks. The winter season, which was less rainy compared to the previous years, may show its reflection in prices in terms of agricultural productivity in the following months, although there is no agricultural drought yet.


There are many factors that feed inflation. As we can see from the PPI increases, the cost undertaking effect continues, indicating that the reflection of past exchange rate increases on the CPI is not complete. We are far from seeing the effect of stabilization in exchange rates after November. This increases the risk of stickiness in inflation. On the other hand, inflation will remain high in the following months, with the lagged effects of cost increases on consumer prices. While seasonal conditions and drought risk pose a risk to food prices; Continuation of the policy of hike in centrally determined prices does not help inflation. With the new year entering; While the increases in electricity and natural gas will have a multiplier effect in terms of affecting both the end user and production costs, the impact of the bridge and highway hikes on transportation costs will increase inflation, rather than a direct effect. In taxation of tobacco products, reducing the tax burden by not making a revaluation every 6 months will not contribute to the inflation increase through administered and directed prices from this source.


In the process that started with the appointment of Mr. Naci Ağbal to Central Bank, he simplified the monetary policy and increased borrowing costs in order to contain the depreciation of TRY. The policy rate brought to the level of 17% seems to provide protection compared to the inflation outlook. Therefore, it can be seen sufficient in the current policy path. We assume that the Central Bank will maintain orthodox policies and take care of inflation risks. The real interest rate calculated according to December inflation is around somewhere above 2%. In the framework of the inflation outlook, which is expected to peak in April and weigh on its decline after May, additional increases will cause the real interest position to weaken. In cases such as the delay in the decline in inflation and the fact that the 15% band is seen in the first months of the year, the Central Bank may consider another rate hike. Our inflation assumption is that although there will be a decrease in the second half of the year, 2021 may occur within the 10-11% range.


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