October Inflation: The End of the Line

Headline inflation in October came out at 1.44% m/m pointing to an annual inflation rate of 7.16%, fell behind the expectations of 1.58% but slightly higher than our estimate of 1.40%. Meanwhile downward trend in core indicators continued, as I-index y/y change declined 7.04% in October and from 7.69% in September. In our view, October reading was another relief provided to the central bank on the inflation front, however, we do not think that clear skies are ahead.

turkey-core-inflation-indicatorsWe expect core inflation to be on the decline until yearend, and peak at 9% in mid-2017. Pass-through effect from a depreciated local currency may even lead further deterioration in inflation.

turkey-consumer-and-produces-prices-indexOn the other hand, inflationary pressures from cost channels appear to be weak.

Going forward we expect the central bank to continue to implement a growth-friendly policy using liquidity tools rather than interest rates. Our prospect is for an average cost of funding rate remaining at 7.75% for some time to come, which is 25 bps higher than 12-month forward-looking inflation expectations.