Türkiye: Despite the slowdown in inflation, the fall in the lira poses an upside threat

Inflation reached 38.2% in June compared to a year ago, falling from 39.6% in May (expected: 38.2%). While the realization on a monthly basis was 3.92% (expected: 4.3%), the decrease in annual inflation was also observed to be at the lowest level in recent months due to the base effect, which has been continuing since November and has started to disappear, and the increase in import prices due to the weakening of the lira.

Exchange rates seem to be the most important issue here. After the elections in May, TL depreciated by 20.3% against the dollar and 22.3% against the Euro in June. TL depreciation on a basket basis means higher import prices and imported input inflation. The effects of CPI may remain high in the near-term, as this upward trend continues after the election, after a free upward correction with the reduction of the interventions on the exchange rate side, and after the CBRT's rate hike from 8.5% to 15%. Considering that the Fed is expected to raise the funding rate to 5.75% by increasing interest rates twice in the upcoming period, exchange rate effects pose an internal and external threat to inflation.

We consider that the upward effects on the exchange rate will continue and this effect will increase the CPI in the upcoming period. Wage increases will also have CPI-increasing effects in the second half. In addition to the depreciation of the lira, the government's interim increase of 34% in the minimum wage and the high treatment of civil servants/retirement salaries will cause inflationary price pressures to continue. We think that a gradual upward trend in inflation can be started as of the July-August period.

As of the new data, we think that the dollar movement will be on the more decisive side, although energy costs do not increase. In this context, we see our year-end inflation expectation as 40.6%. We expect inflation to stay above 40% until the first half of 2024.

Lira Extended Its Loss… Turkish lira depreciated in its 16th week as well… Source: Bloomberg, Dinamik Yatırım

If we look at the sub-items of inflation; All of the main expenditure groups increased on a monthly basis. Core inflation, which excludes volatile items, rose to 47.3% year-on-year from 46.6% in the previous month, with signs that price pressures remain high. Food inflation increased from 52.52% to 53.92% on an annual basis.

On the Producer Price Index (PPI) side, there was a monthly increase of 6.5% in June, while the annual increase decreased from 40.76% to 40.42%. The highest increases in PPI were seen in coke and refined petroleum products with 18.15 percent, metal ores with 13.65% and electricity, gas, steam and air conditioning with 12.54%. Crude oil and natural gas decreased by 6.68%, coal and lignite decreased by 0.08% in June.

Alcoholic beverages and tobacco stand out with 11.13%, transportation 7.96% and restaurants and hotels by 4.32% as items that showed higher increases than headline inflation.

After the appointment of Mr. Mehmet Şimşek to the Ministry of Treasury and Finance, and Mrs. Hafize Gaye Erkan to the CBRT, the intervention school that aims to keep the lira under control and suppresses the reserves is abandoned and the lira is left to float freely. The fact that all this transition was realized simultaneously with the withdrawal of the regulations aimed at providing liraization, which was also tried to be made gradually, indicates that the exchange rate movement will continue to rise in the near future. For this reason, the decrease in inflation will take time, and one of the factors that slows down this decrease is that fiscal expenditures will continue on the budget side. In order to balance this situation in the transition period, it is necessary to increase exports and attract FDI. However, in terms of the value of TL against inflation, the increase in exports can be supported by a predictable exchange rate increase.

If we look from the point of view of the CBRT; At the first meeting chaired by Mrs. Erkan, the policy rate was increased by 650 basis points from 8.5% to 15% and a gradual monetary tightening was directed. As emphasized in the summary published in the days following the MPC, the 5% inflation target remains well below current levels. After the meetings with the TBB, considering the degree of monetary tightening and the emphasis on financial stability, the balance sheet risks of the banks are tried to be minimized in this process and the regulations, especially the bond-buying obligations, are eased with a smooth transition.

The Central Bank will continue to increase interest rates with the aim of "reducing inflation as soon as possible". Considering factors such as the gradual approach and the market yield curve, we think that the rate hike tranches will be spread over several meetings. In this context, the policy rate may be brought to 18% with an increase of 300 basis points at the CBRT meeting on 20 July. With the ongoing additional increases in the remaining meetings, the policy rate may be increased to the 25% band at the end of the year.

Kaynak Dinamik Yatırım- Enver Erkan

Hibya Haber Ajansı