1
03/07/19
Okan Ertem, Senior Economist | Turk Ekonomi Bank A.S.
Turkey – Falling from the top of the CPI waterfall
KEY MESSAGES
We see June’s CPI data as supporting our below-consensus
forecast that Turkey’s central bank will start a cutting cycle
with 100bp at the 25 July meeting.
Current CPI trends point to more aggressive rate cuts; we
expect 400bp to bring the year-end rate to 20%.
Top of the CPI waterfall: Turkey’s June CPI came in at 0.03%
m/m, close to our 0.05% forecast, compared with the
Bloomberg consensus of 0.20%. The fall to 15.7% y/y from
18.7% in May signals the acceleration of a CPI downtrend.
Food prices (which contributed with about a third of the year-
to-date annual inflation) have started to normalise and core
goods CPI also began to show significant improvement,
which signals FX pass-through effects fizzling out (see
Figure 1). Even the stickiest category, services inflation,
decelerated to 14.92% from 15.15%. We see this as a major
support to our expectation of CBRT rate cuts.
Disinflation to halt in July: We estimate various recent
price hikes aimed at repairing the budget deficit will add
153bp to July’s monthly CPI inflation: contributions of 12bp
from food (sugar and tea), 5bp from energy (gasoline and
diesel), 44bp from utilities (electricity) and 92bp from tax cut
reversals (autos, furniture and white goods). Even with the
hikes, the real CBRT policy rate might stay around 7% in
July, paving the way for rate cuts (see Figure 2).
Favourable base effects, due to weak domestic demand
(preliminary trade numbers for June indicate 23% y/y decline
in imports) and lower FX pass through (decline in almost all
core categories), support the downward CPI trend in Q3.
On balance, therefore, we forecast CPI bottoming at 11.5%
in October. Inflationary pressures might show some
resilience in Q4, as base effects wash out. We think annual
CPI will end the year at about 16%, but see the risk as being
to the downside.
Room for plenty of monetary easing: The inflation
trajectory gives the CBRT room for further rate cuts, in our
view. We continue to expect the CBRT to start its easing
cycle with a 100bp cut on 25 July, with a series of further
cuts bringing the policy rate to 20% by the end of the year.
Fig. 1: CPI across core categories (annual, %)
Fig. 2: CPI (% y/y), CBRT policy rate and real rate forecast (% pa)
Sources: Turkstat, TEB
Sources: Turkstat, TEB (dotted lines stand for TEB forecast)
14.8
15.40
14.92
9
11
13
15
17
0
20
40
60
80
05/18 07/18 09/18 11/18 01/19 03/19 05/19
Fresh fruits and vegetables
Core goods
Services
7.11
4.0
18.7
15.7
16.0
24.0%
20.0%
0
10
20
06/18 09/18 12/18 03/19 06/19 09/19 12/19
Ex post real rate CPI Inflation
CBT funding rate
FLASH | CEEMEA
3 July 2019
Please refer to important information
at the end of this report
EM ECONOMICS | EM STRATEGY
MARKET VIEW
We expect stabilisation in geopolitical risk to keep the TRY outperforming peers. Looking at what is priced
into the curve over the next 12 months, we think the market might be overly optimistic about the number of
rate cuts to come. Therefore, we think a long TRY versus pay rates position could have good risk/reward,
given the positive carry on both legs of the trade.(see Turkey: Tactically long TRY and pay 5y rates, 2 July)
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