Turkey: Inflation - as expected

Turkey: Inflation - as expected

At 0.3% m/m, February's CPI inflation was slightly below the market consensus and our forecast (both at 0.4% m/m). Consequently, annual inflation declined 0.3pp to 7.0%. The lower-than-expected CPI was mainly due to food and clothing prices. Annual food inflation fell from 6.85% in January to 5.60% in February, partly correcting the 3pp rise previous month. The decline in clothing prices was higher than the seasonal averages at 6.4% m/m in February.

Nevertheless, core H-inflation increased 0.1pp to 5.8% y/y, mostly on the back of the increase in motor vehicle prices (from -1.57% y/y in January to 0.88% y/y in February). Rental inflation was broadly flat at 5.55% y/y. On our calculations, services inflation increased 0.1pp 7.2% y/y mostly due to the increase in transport services and communication prices. The short-term momentum of core H and I indices showed that the upward pressures are abating.

Overall, February data suggests a broadly flat inflation outlook looking onward. Yet, currently inflation is 2pp above the 5% target, and we expect CPI inflation to hover around 7% during the remainder of the year. Nevertheless, the CBRT is not in a hurry to bring inflation down to targeted levels, and thus unlikely to react the above target inflation readings. The evolution of the exchange rate is key to CBRT's interest rate decisions. Rate cut expectations could emerge if TRY appreciates further from its current levels. At the current exchange rate level, we expect the CBRT to keep rates on hold and increase reserve requirement ratios.

Selim Çakir
Chief Economist TEB