Following the Central Bank's messages that it is understood that inflation will continue to be the main policy focus, we will enter the new week by watching the March inflation data. In March, we expect inflation to realize at the level of 16.1% on an annual basis with a monthly increase of 1%. Inflation rose to 15.6% in February due to the increase in import prices and oil prices. We expect these two factors to continue to be effective in March inflation.
Inflation accelerated in the 5 months after October due to increased import costs and oil prices, reaching 15.6% in February. The gap between PPI and CPI reached 11% with the cost effect on PPI. The continuation of the increase in PPI shows that this cost burden continues. This cost impact comes from both exchange rates and commodity prices, especially rising oil prices. Oil prices, which were around 65 USD in March, also show a significant base effect compared to the prices that had bottomed due to the pandemic effect in the same period of the previous year. We think that the upward pressure will continue and inflation will increase after March as the effect of this cost transition continues to reflect on the CPI. In the second half of the year, a decrease in the weight of the current factors, seasonal conditions and the base effect and disinflation are expected, but the upward risks related to this process have been weighted more especially in the framework of the inflationary effect of the recent TRY movements.
TRY depreciated by 10% in March, with the market reflection of the CBRT mandate change and the increase in US Treasury yields. Of course, this kind of volatility and uncertainty makes it difficult to price in a positive way forward. In this respect, there may be an additional impact on the inflationary pressure from the import side. The effects of exchange rate and interest rate movements increase the deviation band on the import costs side. The new depreciation pressure on the local currency value also reveals the necessity of tight policy implementation by the Central Bank.
The new Governor of the Central Bank, Mr. Şahap Kavcıoğlu’s tight monetary policy messages at the economist meeting were perceived positively by the market. If we take into account the inflation focus and the positive real interest rhetoric (of course, it is also important here how to weigh the actual inflation and the expected inflation); The 19% interest seems to remain in practice for a while. When we consider the general outlook of inflation, it seems unlikely for a rate cut on April 15th MPC. It is important to say that the policy rate will be kept above the CPI for the upcoming period.
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