Turkey: Anchorless inflation expectations

After the last rate cut by the Central Bank, we expect inflationary movements in the economy to increase further and new upward loadings on expectations. For this reason, we emphasize our expectation that inflation, which we predict will rise above the 80% band as of August, will be higher in the following months. While we state that we will see the effects of the latest natural gas and electricity price hikes on the next September inflation, we estimate that annual consumer price inflation reached 82.6% in August as the broad-based increases outweighed the relief provided by low fuel prices.

Inflation reached 79.6% in July. While this rate points to the highest levels in the last 25 years, it is also almost 16 times the medium-term inflation targeting of 5%. With the Central Bank’s lowering the policy rate by 1 point in August, Turkey’s inflation-adjusted interest rate reached -66.6%. This rate corresponds to the lowest rate among emerging markets in the real interest league. Of course, this situation will not provide much advantage for Turkey among peer markets in a conjuncture where the Fed is ahead of all markets by raising interest rates and poses a risk in terms of hot money flow to developing countries. .

The Central Bank of the Republic of Turkey lowered interest rates to 13% in August to support growth. We expect this to weaken the lira. At the same time, the weakening of the lira will trigger upward price pressures on all items affected by the exchange rate. Of course, fuel inflation comes first. Keeping the threat of an energy crisis originating from Russia constant during the winter months, if the movement in exchange rates shows an upward attack again, it will be difficult to control raw material and fuel inflation, and all these price developments will also be reflected in domestic price adjustments. This situation should not be viewed only on the basis of input and energy inflation. Rather than the direct price hikes to the consumer side, we see the main driver of inflation as the hikes made for the use of producers and industry. Of course, exchange rate pass-through, market pass-through, consumer behavior and mark-up prices change the duration and degree of the transition to final prices, so it is not possible to make an exact forecast for monthly inflation. However, it is clear that the total increase in inflation will be much higher than that directly calculated by the consumer.

In September, new factors such as school expenditures, public services, and hikes in insurance fees will increase the upward pressure on periodic inflation. We will observe the direct and indirect effects of the new natural gas and electricity price hikes on September inflation. While calculating the direct effects on residential use as 0.8 points, we think that an inflation contribution of close to 2 points can be achieved by taking into account the diffusion effect of the 50% increase on the industrial side. Although the Central Bank estimates that the year-end inflation will be 60.4%, we think that the current estimation path may need to be pulled upwards, and we foresee the year-end inflation as 73.8% as a higher rate.

Kaynak: Tera Yatırım-Enver Erkan
Hibya Haber Ajansı