April Inflation: Slows to 3-Year Low

April inflation was another negative surprise and the drop was sharper than expected for the second month in succession. The reading of 0.78% dragged the annual rate down to 6.6%, primarily due to decreasing food prices. With that being said, it is worth to note that the strong base effect was also helped the annual inflation fell this sharply.

Consumer and Produces Prices in Turkey

Core inflation (the I index) continued to remain high, was stuck at 9.4% by declining only 10 bps. Considering the clothing prices which rose 12% m/m in April, there was substantially favorable developments on the core inflation front, however, the seasonally adjusted annual rate of core inflation is still slightly below 8% which is well above the targeted range of 5%-7%. Needless to say that unlike its peers, Turkish economy will be facing challenges arising out of inflationary pressures.

Core Inflation Trends in Turkey

Owing to the improvement in the headline inflation the policy implication of April’s inflation reading may very well be another cut (50 bps) in the upper band in May. With that being said, given the strength of core indicators the headline inflation is set to rise back over 7.5% in 2H 2016 and to end the year around that level, suggesting that underlying inflation dynamic remain favorable within a mid-term perspective. As we believe that the current stance of the central bank is inappropriate for combating inflation, a tight monetary policy should be implied to reduce inflationary pressures. Also, further rate cuts in the near-term would depend on global financial conditions rather than monthly inflation readings.

Turkey Post-MPC: On The Horns of a Dilemma

Turkish MPC remained on hold once again yesterday as one-week repo rate, or so-called policy rate stood at 7.5%, along with overnight lending and borrowing rates at 10.75% and 7.25%. The central bank for sure will maintain the status quo until the end of Basci’s term in April.

Tight monetary policy stance will be maintained” part of the guidance was also once again preserved. CBT lifted its average cost of funding recently which has been slightly above 9% since late January to that end. However, with double-digit core inflation rates, it is still hard to admit that CBT is on its way to achieve its long-term inflation guidance.

On the latest survey of expectations report we saw forward inflation expectations still way above the targeted inflation rate of 5%. CBT has already guided for achieving the target in 2018 earliest.

Turkey - Forward Inflation Expectations

Interestingly, while maintaining a “tight” monetary policy stance, M2 money stock has been consistently growing, in other words, CBT has appeared to be pursuing a quantitative easing.

Turkey - M2 Money Stock

Anyone should be dwelling upon consequences henceforth.