Turkey: Additional deterioration in the inflation outlook reveals the necessity of a rate hike
Turkey’s consumer prices showed an increase of 2.3% in November, while annual inflation was 14%. Our expectation was for a monthly inflation of 1% and an annual inflation rate of 12.6%. It is seen that there is more deterioration than expected in the outlook of inflation, which accelerated with the reflection of the lagged effect of the depreciation of TRY.
If we look at the sub-items of inflation; An increase is observed in all of the main spending groups. Exchange rate pass-through is clearly observed in the core inflation picture; The B and C indicators increased to 13.72% and 13.26% on an annual basis. Transportation and food prices increased by 4.51% and 4.16% as the items that increased higher than the headline inflation. In transportation, the rise in pump prices in the framework of the exchange rate and rising oil prices was effective. The upward pressure on food inflation has also increased intensely recently, in this context, it is observed that food inflation rose from 16.5% to 21.1% in November on an annual basis. Energy inflation also rose to an annual level of 4.28%. While the monthly increase in core goods group was 3.76%, durable goods in this group increased by 5.68% due to the high increase in exchange rates. The monthly increase in services inflation was 0.62%, and within this group, restaurants and hotels increased by 1.13% due to the pandemic effect.
As a result of the impact of the cumulative depreciation of TRY since August, there has been an additional deterioration in the general inflation outlook. The exchange rate effect may cause effects on prices in a shorter period of time due to the deterioration in the underlying trend of inflation. Cost undertaking continues on the producer side, as PPI increased by 4.08% in November to 23.11% annually. The change in the PPI-CPI spreads points to additional upward pressure in terms of the general outlook of consumer inflation. The fact that TRY experienced the biggest exchange rate shock after 2018 caused a significant deviation from inflation expectations.
The Central Bank shifted to policies that prioritize price stability and started funding at a single interest rate. The bank set this interest rate at the level of 15% considering the high inflation rate. The real interest rate, which was 2.8% when calculated according to October inflation, has now declined to 0.9% in the calculation according to current inflation. Within the framework of the Central Bank’s determination to control inflation, it must allow the interest rate to be high enough. We think that an interest rate hike will be needed at the December 24th MPC in order to strengthen the real interest position, to help the TRY to stabilize and to control the deteriorating inflation picture. If the real interest rate is to be kept above 2% according to current inflation, this rate hike may be around 150 basis points. On the other hand, there are developments that may affect the economic recovery in global and local terms. Although it is thought that vaccine developments will help the revival in global economies, there is an environment in which global central banks support the economy in the current period. Inside, we will see that the economy slows down further with the new shutdown measures taken. In other words, again, a growth-inflation dilemma can be mentioned.
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