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Turkish inflation tops out above 75 pct y/y

3 Jun 2024 10:30|Bartosz Sawicki

Inflation in Turkey reached its cyclical peak. In May, the annual CPI rate accelerated to 75.45 pct from 69.8 pct a month earlier, reaching the highest level since November 2022. The most recent spike is attributed to the base effects and removal of the gas subsidies. Turkey's longstanding inflation problem stems from a long period of ultra-loose monetary policy, a lack of fiscal prudence, and a slump in the lira.

The U-turn in policy stance after Recep Erdogan's re-election last May is starting to bear fruit. Underlying price pressures begin to ease. Consumer prices jumped by less than 3.5 pct m/m for the third consecutive time. Consequently, the Turkish central bank should stay put in the months ahead as interest rates reach their terminal level at 50 pct. In March, the one-week repo rate was raised by 500 basis points to halt the renewed slump of the lira, faltering capital inflows and noticeable deterioration of price dynamics. Resilient domestic demand and loose fiscal policy suggest that inflationary risks prevail and will continue to require a tight policy stance until the last quarter of 2024.

The Central Bank of Turkey is confident its tight policy stance will prove sufficient, suggesting that the March move was a one-off adjustment rather than a resumption of the tightening cycle that began in June 2023 with a base rate of 8.5 pct. The key question for any cuts this year will be how quickly price pressures will abate after that, given the ongoing depreciation of the lira and unstable, de-anchored inflation expectations. The CBT's official projections, which have been revised upwards, see inflation falling to 38 pct y/y. Market consensus is less optimistic and considers the annual inflation rate to decline to around 42 pct in the final quarter of 2024.

The development of the lira and changes in the level of international reserves are other influencing factors that will need to remain on inventors' radar. Controlling price pressures remains crucial in bolstering investor confidence in the longer term. A revival of foreign capital inflows is required to replenish foreign reserves and stabilize the currency. Although the lira slump has lately paused, the USD/TRY exchange rate has failed to recover below the 32.0 level. Fintech Conotoxia expects the Turkish currency to continue its steady decline at a pace that will not trigger any additional policy action. We still see the USD/TRY exchange rate hitting 35.0 in the fourth quarter of 2024.

3 Jun 2024 10:30|Bartosz Sawicki

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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