Turkey: We expect exchange rate increases to keep inflation high in the coming months

The most interesting macro announcement this week will be the October CPI figures to be announced tomorrow.

Our forecast is 2.10% monthly and 11.90% year-on-year, in line with the market median. The market median is 11.86% annually. We expect that the ongoing depreciation of TRY will continue to increase inflation in double digits until the end of the year and cause high CPI increase in the coming months.


Inflation expectations are deteriorating rapidly. While the cost effect of the depreciation in TRY was felt intensely in producer inflation in August and September, it is observed that the core inflation trend turned up significantly. Although we expect this exchange rate effect, which does not fully reflect on the CPI side, to pass through a cumulative and lagged mechanism in the coming months, we anticipate that additional depreciation in TRY will increase this effect. In this context, the pressure on inflation will continue for the rest of the year. We expect inflationary pressures to be fueled by the stickiness effect as well as exchange rate pass-through. The pass-through effect of the exchange rate to prices may also vary depending on the magnitude of the exchange rate shock and the underlying inflation trend.


The Central Bank has been increasing the market interest rates by tightening liquidity indirectly against the depreciation of TRY since August. On the other hand, the policy of the Central Bank cannot create an effect that a direct tightening can show, since the policy rate is far below the current market rates in the market. Although the efficiency of the interest rate corridor and the predominant use of LLW in market funding do not break the depreciation effect of TRY, additional exchange rate increases increase the upward pressure on inflation. The Central Bank stated in the latest Inflation Report that additional tightening moves could come within each instrument, and increased its year-end inflation forecast to 12.1%, above the previous forecast of 8.9% and the New Economy Program forecast of 10.5%. The average expectation of market participants and real sector representatives in the CBRT October Expectation Survey was at the level of 11.76%. On the other hand, we expect the year-end inflation to reach 12.2%.


The next MPC meeting is planned to be held on November 19th.



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