We expect Turkey’s rising inflation trend to be dominant and the projection range to open with increasing risks. While the risks transferred from the depreciation of the lira are disturbing in terms of increasing costs, the recently increasing geopolitical risks forcing a global commodity price increase in the upcoming period may cause significant increases in food and energy items. In this context, we will see an inflation path higher than 50% in Turkey in the coming months. The war in Ukraine could push living costs even higher after February.
Inflation, which we expect to rise to 52.4% year-on-year with a monthly realization of 3.4% in February, continues to be fed by rising food and energy costs and the lagged effects of last year’s depreciation of the lira. Consumer price inflation in Turkey reached 48.7% in January, the highest in 20 years. The central bank expects inflation to go further in the coming months before ending this year at 23.2%.
Inflation is currently preparing to settle at a level more than 10 times higher than the Central Bank’s medium-term target of 5%. As this situation will continue to deepen the inflation-adjusted return of Turkish assets in the negative region, there will be the risk of keeping the demand for foreign currency active with the desire to protect savings from inflation and continuing to feed the upward pressure on financial dollarization in the Turkish economy.
In an environment where the war in Europe threatens economies and increases global energy and food inflation, the concept of inflation will be much more challenging. At the moment, we see that the government’s actions to regulate inflation only create some balance and do not change the general inflation trend. In this context, we partially see the general inflation effect of the decision to reduce taxes on basic foods in February, and we think that the effects of the geopolitical crisis and especially the grain prices will greatly reverse this regulation. Due to high food, energy, rent and pharmaceutical costs, periodic inflation will be on a high path in February. Some price hikes, which were reflected and hung in February, caused this effect to continue in the second month of the year. Factors such as the status of TRY and energy costs pose upside risks to year-end inflation forecasts.
Russia is the leading country in our natural gas and oil imports. In addition, Russia ranks third in the world in wheat production from agricultural products. Inflation is quite high and the PPI, which is close to 100%, causes the cost burden here to be still very high. In an environment where consumer inflation approaches 50% as a very high band, food and energy-based inflation stand out as the items that increase the risk of deviation the most.
In this context, we evaluate the risks related to the forecast path of the Central Bank in an upward direction. Although we expect a fluctuating course throughout the year, we expect an upward trend in inflation, especially in the summer months. This situation shows that an inflation peak can be seen in a band above 55% during the year and that the base effect brought about by the high periodic realizations of November-December 2021 in the last months of the year may partially pull down the annual inflation. However, as can be seen, we are more cautious in our inflation forecasts than the Central Bank, and we consider that we will directly see the cost of living brought by the Ukraine war in terms of food and energy.
If inflation comes in at the rate we expect, Turkey’s real interest rate will reach -38.4%, the lowest rate among the emerging markets followed. The main moves in the fight against inflation are concentrated on the side of fiscal policy, and in this process, measures such as tax reductions, subsidies and other incentives and currency-protected lira deposits come to the fore. We do not expect a policy tightening response from the central bank regarding the increasing inflation rates at this stage.
Kaynak Tera Yatırım-Enver Erkan
Hibya Haber Ajansı