Turkey: Inflation to slow down with the help of base effect

As of December, we predict that inflation will slow down sharply on an annual basis with the help of the base effect. In this context, we expect a slowdown from 84.4% in November to 68.4% in December according to our forecast. We think that this will be entirely due to the base effect, which stemmed from the same period of the previous year and which we expect to form the basis of the inflation decline in the next few months. Despite this, we believe that although inflation will decline on an annual basis, periodic price increases will remain above the averages of the last 5 years, and that broad monetary and fiscal policies will also limit the decline in inflation.

In December, it is observed that the increase in periodic inflation remained below the average, except for 2021, which coincided with the exchange rate shock. For the December period of this year, the easing in transportation costs due to the decrease in road fuel prices, plus the stable exchange rate may balance the monthly inflation increase. However, we expect a revival in spending and consumption trends due to high inflation, with wage increases for the next year and the effects to be injected from factors such as early retirement, CGF, and credit expansion. This will support periodic price increases at a high rate, probably around 3% on a monthly basis.

On the other hand, macroprudential measures, such as the issuance of securities to banks for non-selective loans, may have the effect of limiting consumption or working capital-based credit expansion due to the risk mode. In an environment where market interest rates differ, it is possible for banks to limit their non-selective loan outflows.

Comparison of CPI, CBRT Policy Rate and Medium/Long Term Inflation Target… Source: Bloomberg, TurkStat, Tera Yatırım

We still see inflation as widespread, evaluate it and consider it to become permanent as the most important risk. Inflation, which we think has passed its peak, will lose momentum on an annual basis after this period due to the base effect of the high realizations stemming from the lira crisis at the end of 2021 and the energy crisis in the first half of 2022. It seems highly likely that this base effect will reduce annual inflation to 40%, including the period until the election. However, we think that factors such as wage increases, early retirement and credit expansion will create strong demand in the first half, keeping monthly inflation rates high and slowing down the decline in inflation.

If we look from the point of view of the CBRT; Factors such as the combination of expansionary monetary and fiscal policies and its possible erosion effect on the lira, low interest rates motivating consumption and borrowing may still keep inflation above target levels. As a matter of fact, we see the CBRT Inflation Report expectation, which is currently 22.3% (in order to reach this rate, the monthly average inflation must be 1.7%) in an optimistic framework. Our expectation is that by the end of 2023, inflation will be 42.3% (with an average monthly inflation of 3%). This would mean more than 8 times the Central Bank’s target of 5% in the medium/long term.

We think that after the slowdown in inflation due to the base effect, the disinflation area will remain limited and we think that the tight inflation outlook will continue.

Kaynak: Tera Yatırım-Enver Erkan
Hibya Haber Ajansı