Turkey: Inflation to rise higher than interest rates

We expect the increase to continue, especially due to the high oil prices and the weak lira, in the direction that the risk balances constituting the inflation are going against.

We expect the increase to continue, especially due to the high oil prices and the weak lira, in the direction that the risk balances constituting the inflation are going against. In this context, we anticipate that the periodical increase of 3% will not create the base effect expected in the previous months and annual inflation will rise to 20.7%. On the other hand, it is very likely that inflation will remain on the rise, as the effects of the recent meltdown in the lira will be felt more deeply in the coming months. In this respect, the upcoming period will be quite challenging regarding price stability.


In particular, the recent price volatility factors, which constitute a separate composition from the global cost factors, will weigh more on inflation. In this respect, we expect volatility and increase, especially in foreign currency indexed input and price components. The lira has been in a rapid depreciation in the last period, and at the same time, it is moving in a direction that makes it difficult to create an inflation expectation. We expect this to have a significant upward effect, especially on periodic inflation realizations.


While feeling the price warming effects of the policies implemented in line with the easing in financial conditions, its basic perspective is not only on volatile factors such as food and energy; At the same time, we think that it will be weighted in core trends. Core inflation trend, albeit slower than headline inflation, is quite high and has stopped the decline in recent months. Especially due to the compelling effects of the exchange rate, price trends are also increasing on the side of goods and services with prices that are not directly indexed to foreign currency. On the other hand, the pass-through coefficient from PPI may be more reflected in the final goods price at the point of high prices encountered in stock replenishment. This is because the renewal of low-cost stocks incurs more costs at the point of acquiring new goods from the market, and the need to renew the prices of existing stocks in order to maintain the profit position arises. Due to price volatility in futures shopping, price determination becomes more difficult.


It should be noted that factors such as the revaluation rate being determined as 36.2% for 2022 and the expected minimum wage hike will also have an impact on the increase in inflation. If the details on this issue significantly increase the total costs of the companies, especially in terms of taxes and premiums, we may see more reflections on product prices. Demand, which is delayed and accelerated in anticipation of a rise in prices, may also increase the price pass-through factor. We think that the pass-through may be faster in the coming period due to both producer costs and the increase in exchange rates.


Inflation will likely rise for the sixth month in a row, rising above 20%, more than four times the central bank's 5% target. As the Central Bank may continue its rate cuts, possibly in line with the new economy perspective, we think that the increase in inflation may push the real rates of the lira (policy rate minus inflation) even deeper. If November inflation is in line with our forecast, we will have a real rate of -5.7%, well below the historical averages and the levels seen in other emerging markets. We think that the Central Bank may lower interest rates at the meeting on December 16, despite the disincentive factors of inflation.

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