August Inflation: Short Term Relief Provided
- September 07, 2016
- Oguz Erkol
Headline inflation surprised on the downside in August with m/m realization of -0.29% against the market expectations for a flat reading. Annual inflation lowered to 8.05% from 8.79% a month ago. Meanwhile core inflation has also declined in August to 8.4% from 8.8% in July.
The downward moves in food and clothing prices led a boosted inflation outlook. Though food prices that has remained volatile through this year make it extremely hard to estimate the trajectory in months to come. Yet, one should expect a pick-up in prices due to resumption of food exports to Russia. The inflation rate will most probably remain above the target of 7% with positive contribution from food prices. Also note that oil prices and imminent rate hike by the US Federal Reserve are likely to be influential external factors that could have an impact on the performance for the remainder of the year.
Turkish central bank will continue to loosen policy with O/N lending rate cuts until average funding rate hit one-week repo rate at 7.5%. At some point, central bank’s efforts to boost the economic activity will be increasingly relied on loosening liquidity.
Given the lower local funding costs that generates plenty of room for carry trades, we believe that short term returns are warranted in Turkish government bonds despite the cloudy outlook in inflation.