Turkey’s consumer prices showed an increase of 1.68% in January, while annual inflation was realized as 14.97%. Our expectation was for a monthly inflation of 1.40% and annual inflation of 14.65%. While the effects of past exchange rate increases on prices continued, it was observed that inflation increased to 15% band for the 4th consecutive month in January.
If we look at the sub-items of inflation; There is an increase in most of the main spending groups. The exchange rate pass-through is clearly visible in the core inflation view, with indicator C, which excludes variable items such as food, energy and gold, from 14.31% in December on an annual basis to 15.50% in January. The broad-based effect of the weak TRY, which was the most important factor that increased inflation in previous months, was reflected in January. As the items that increased higher than the headline inflation, health stands out with 4.25%, housing 3.02% and household goods 2.90%. PPI and CPI gap continue to be wide due to the increase in PPI to 26.2%. Food inflation fell to 18.1% year-on-year, but posted another rise above the headline inflation with 2.48% on a monthly basis in January. Combating problematic food inflation is at a critical place in bringing inflation under control and will be one of the main compositions of 2021. Energy inflation also increases from 5.64% to 7.86% annually due to the increase in exchange rates and the rise in global commodity / oil prices.
We are going through a difficult period in terms of inflation. The cost effect reflected from the PPI to the CPI, the increase in commodity prices and the stickiness effect that will be seen in inflation for a period will cause it to continue above 15% for a period of time. Inflation may reach its peak in April in line with the current outlook and trend. With the second half of the year, with the effect of the appreciation of the TRY, the easing of the currency pressure, the easing of the food inflation with the improvement of the season and the base effect that will work in our favor, the inflation may start to decline. However, the risks regarding the disinflation process and year-end expectations are still upward. Although the performance of TRY has been positive recently, especially after the change in economy management, we will not see the reflections of this immediately, we will see a little bit of change in the tendencies of price makers, the settlement of expectations and the delayed transition effect in the later stages of the year.
The Central Bank chose not to change its 2021 interim forecast of 9.4%. However, it has also committed to keeping its monetary policy tight to support the disinflation process. The Central Bank does this not for a specific period; It plans to implement it until it reaches the medium-term 5% target envisaged in 2023. Policy steps are taken in a targeted and very positive direction. In the first half of the year, the policy rate will be at or slightly higher than the current level (there may be another option to increase interest rates depending on the possible peak of inflation), then the interest rates may decrease in line with the fall of inflation, but within the framework of the policy implemented by the Central Bank, the policy rate will be above current inflation level enough, to provide "a real interest standardization".
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