Turkey: Inflation picks up, increases the proactivity pressure on the Central Bank

Turkey’s consumer prices increased by 0.91% in February, while annual inflation was realized as 15.61%.

Turkey’s consumer prices increased by 0.91% in February, while annual inflation was realized as 15.61%. Our expectation was for a monthly inflation of 0.8% and an annual inflation rate of 15.5%. Thus, inflation was realized slightly above both the market consensus and our expectations in February. The permanent effect of the TRY weakness experienced in the early period and the increase in oil prices have a determining effect on inflation.


If we look at the sub-items of inflation; There is an increase in most of the main spending groups. Indicator C, which excludes volatile items such as food, energy and gold, rose from 15.5% in January to 16.2% in February on an annual basis. Health with 3%, food and non-alcoholic beverages with 2.57% and restaurants and hotels with 1.32% were the items that showed a higher increase than the headline inflation. Annual inflation in the food item increased to 18.4% as of February. In energy inflation, as a reflection of the recovery in global oil prices, there is an annual increase from 7.9% to 8.8%.


Although we follow a process of appreciation of TRY, inflation continues to increase due to both internal factors and global pressure brought about by the increase in commodity prices. Despite the appreciation of the TRY, the lack of such an adjustment in prices stems from both the lagged transition effect and the stickiness in inflation. Because at the point of expectations, the deviation range is still high, so price adjustments are not made downstream as it was done at the pace of upward movement. Apart from that, when we look at the monthly increase rates, food prices still continue to be a problem. Considering that the increase in global commodity prices will bring inflation pressure spread to the world, the worst has not passed in inflation as of this month. Inflation may peak near 16.5% in April.


The Central Bank is aware of inflationary pressures and has made its previous rate hikes accordingly. Of course, the high level of uncertainty in inflation is currently the most challenging issue for the CBRT. So, there is a possibility of taking a proactive step on March 18th. Pressure from inflation and global interest rates gained more weight than the MPC a month ago. If there is another rate hike, it will likely be the last rate hike. The squeezing effect on inflation, the failure to start de-dollarization, the uncertain situation created by the recent exchange rate increase and the pressure of global interest rates are ripe for the possibility of an interest rate hike in the first half of the year. On the other hand, the issue of inflation should be addressed not only with the increase in interest rates, but also in terms of the general policies of the economy.


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