Turkey: Factors affecting inflation continue to be active

The main components of inflation continue to have an upward effect due to the effect of the depreciation of the exchange rate and the increase in oil prices. We will see the effects of this in April inflation data, which will be released on Monday. In this context, we expect inflation, which increased for the sixth consecutive month in March and reached the level of 16.2%, to continue to rise. We have an annual inflation expectation of 16.7%, corresponding to a 1.3% monthly inflation increase for April.

We focused on exchange rate increases and oil prices as two main factors. Brent oil prices exceeded the 65 USD band. Brent oil prices, which were around 27 USD at this time last year, will cause a serious increase in energy costs compared to last year. This will cause the base effect to work against the energy items. Increases in the prices of energy and, in fact, in the general commodity group, increase the global raw material and energy prices and point to a general spillover effect in terms of inflation within the framework of their usage areas. An additional effect comes when we add the depreciation of TRY to the increase in the price of raw materials originating from abroad. TRY has lost nearly 12% since the last 10 days of March. In inflation, we think that the pressure on import costs will continue after April, which was supposed to have peaked in the previous period.

It is also necessary to mention the price effects that have already affected the costs but have not yet passed into the CPI. PPI reached 31.2% as of March. The gap with the CPI is 15 points. The price movements that will occur in the full closing period in May may also accelerate the effect of transition to the CPI. This will mean a hike in final product prices. The problem that the CPI will continue to remain high with the impact of the future cost reflection will continue to pose an upside risk during the resolution of inflation. In core goods, the demand effect that will accumulate or be pulled forward in the short term may trigger price increases. This situation also means a high course in terms of inflation in the phase after April.

In the 2nd Inflation Report of the year, the CBRT increased its year-end forecast from 9.4% to 12.2%, and updated its 2022 forecast from 7% to 7.5%. The expectation on the food inflation side has been revised up from 11.5% to 13% for the end of 2021. Market participants think that the inflation rate may be above these projected levels. Chairman Mr. Şahap Kavcıoğlu made a commitment to a tight monetary policy, saying that the interest rate application above inflation will continue. We do not expect any interest rate changes at the CBRT MPC meeting on May 6. Lack of additional tightening guidance and the CBRT's assuming April inflation as a peak, eliminating the possibility of a rate hike; The fact that inflation is not in a downward stage also postpones the possibility of a rate cut. After inflation shows the downward phase due to the base effect in the second half of the year, there may be interest rate cuts depending on this.

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