Consumer inflation in Turkey rose to 54.4% in February, its highest reading since 2002. Broad-based and multi-component inflation represents the main driver of the weak lira and higher food and energy costs. Although the marginal effects of the recent increase in commodity prices are not yet included in February inflation, we predict a cautious inflation path in an environment where the war in Europe will directly affect global economies and food and energy inflation in the world. In this context, upside risks regarding the course of inflation during the year and year-end forecasts have increased.
The oil price is at its highest level in recent years, and depending on the course of the war, pricing due to a possible supply shortage may further support the rise. It is necessary to take into account the direct and indirect effects of this on the current account balance and inflation. According to our calculations, every 10 USD oil price change has an inflation effect of approximately 1.5 points. Regarding food, the positive situation is in the form of a decrease in prices as non-exportable fresh fruit and vegetables are directed to the domestic market, but grain prices will be under upward pressure due to the wheat production of Russia and Ukraine and will affect food inflation.
Of course, on the current inflation level, the general pressure continues due to the intense food, energy and natural gas and electricity price hikes carried over to February. The increase level in the PPI and the price-cost gap between them also support the high path phenomenon in terms of the reflection of these assumed producer costs in the coming period. Probably, in addition to the current factors, there will be a wave of inflation that will come from the factors of the last Ukraine war and rising prices. This situation, which we expect to be reflected in the following months, can also be expected to support a move towards the 60% band in the summer months.
If we look at the sub-items of inflation; An increase is observed in all main expenditure groups. According to Indicator B, which excludes energy, unprocessed food, alcoholic beverages, tobacco and gold, annual prices rose 47% in February, accelerating from 43% in January. Food and non-alcoholic beverages stand out with 8.41%, household goods by 7%, health care 6.39%, and miscellaneous goods and services by 6.01%, as items that showed higher increases than headline inflation. The narrower C indicator, which excludes variable items such as food and energy, rose to 44.1% in February, reflecting the cost pressures on core goods and services. Food, which has a share of 25.32% in the entire inflation basket, may stratify the inflationary effect in food in the coming months, if the supply problems of wheat imported from Russia and Ukraine are taken into account. We will expect that the recent increase in Brent oil prices to 115 dollars will be reflected in the components such as fuel oil and natural gas.
Although the exchange rate is more balanced than before December, it can be expected that the rises that may arise due to global risk aversion, foreign trade difficulties to be created by the sanctions on Russia, the contribution of the current account balance to decrease and stability difficulties in this factor will reflect on cost inflation. When it comes to the exchange rate, it is necessary to emphasize the FX-linked deposit phenomenon, because in periodic returns above the break-even point, the public finance or monetary expansion phenomenon comes into play, and this may be reflected in inflation risks. We can say that we are faced with a multidimensional inflation risk, both on a global scale and on the basis of domestic dynamics. Although the risks to the current forecast path of the central bank are upwards, we expect inflation close to the 45-46% band as the year-end forecast, and a decrease towards that band will occur with the heavy base effect in December.
With the recent rise in inflation, Turkey’s real interest rate (one-week repo rate minus inflation) has moved deeper into negative territory, by far the lowest among major emerging markets at -40.4%. While the main phenomenon in Turkey’s new economy perspective is current account surplus, considering the tension in Russia and Ukraine and the process that started with the military operations initiated by Putin, the crisis, which was brought to the top with the SWIFT ban and other sanctions on Russia, may make the rise in energy prices longer. We consider that this situation, which may have an impact on our exports and tourism-based revenues in the direction of the deterioration of Russia’s economic balance, reduces the possibility of a current account surplus. Russia supplies 41% of the natural gas it needs in Europe, and the economic dimensions of the current crisis will negatively affect the economic development in the continent. The 10 USD change in oil prices also affects the ratio of current account deficit to national income by half a point, while it has an effect of 4.4 billion dollars on the import bill. At the same time, 80% of Turkey’s cumulative trade deficit of approximately 18 billion dollars in the first 2 months of the year comes from the energy deficit.
If the central bank does not revise it, it expects price increases to fall to half the current level by the end of the year. In the new balances created by Russia’s invasion of Ukraine, we do not see this prediction as possible. In the policy planning that has focused on commercial loan growth and economic activity in the recent period, we see that the phenomenon of high inflation is directed to the side of fiscal policy and financial products. The rise in oil and food prices due to the Russia-Ukraine crisis, the decreasing contribution of tourism and export revenues, and the deteriorating current account balance and financial markets make it difficult to recover the inflation issue. The policy strategy based on the disinflationary path forecasts and liraization put forward by the Central Bank under the current conditions shows that there will be no interest rate changes on March 17. In the MPC statement in December, we also received the signal that interest rate movements will be suspended due to the front-loaded financial easing phenomenon, so we do not expect any action. The central bank may need to make new assessments within the framework of market dynamics later this year.
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