February Inflation: Simply Backtracking

Having lived up to all the hype, Turkey’s February headline inflation printed a double-digit figure. Moreover, further upside movement should be expected as core indicators, the negative base effect of food prices, and most importantly, producer price index that is hanging around its record highs in a decade. Indeed, Turkey’s PPI hit 15.4% in February, which is the highest figure posted since July 2008, signaled some pressure to be felt arising out of cost channels.

Our long-term trend for the core indicator D-index suggests that it may already have reached at the end of upward trend, while we see it fit to add annotation due to above-mentioned factor that are able to lift the inflation unfavorably.

That said, Turkish central bank, at the peak of its well-known unorthodoxy, keeps the effective funding rate above the 12-month forward inflation expectations, as it is currently throwing money around with a cost almost 250 bps above its policy rate. We expect the bank to maintain its policy, and lift its marginal funding rate by another 100 bps in the upcoming monetary policy committee, which is scheduled to the day after the US Federal Reserve FOMC where another 25 bps could be added to the cost of global reserve currency.

Meanwhile Turkish lira’s performance has absolutely failed to paint a promising picture.