Eyes on the inflation rate for March

Last week, the Turkish Lira dropped past 4 per United States dollar and recovered on March 29-30. Some observers attribute the recovery to the efforts of the companies to draw their balances in the sheets just before the end of the first quarter. Thus, it would not be a surprise if the lira drops past 4 per U.S. dollar again in the following days.

The inflation data for March, due to be disclosed by the Turkish Statistical Institute (TÜİK) on April 3, will also affect the exchange rates.

According to the price indexes released by the Istanbul Chamber of Commerce (İTO) on April 1, retail prices rose 1.26 percent and wholesale prices picked up 0.41 percent in March compared with the previous month.

Even though there have been gaps between the numbers often released by the TÜİK and the İTO, the data released by the latter may help forecast the official inflation data by the TÜİK.

The consumer price increase in February was announced by the TÜİK as 0.73 percent, which was over the expectations in the markets. The annual inflation rate was calculated as 10.26 percent.

Since inflation numbers in February exceeded expectations, the government circles insisted the annual inflation rate would drop below 10 percent starting from the end of April.

The consumer price increase in March 2017 was 1.02 percent and 1.31 the next month. Thus, there is still hope of bringing down the annual inflation rate below double digits at the end of April, only if the monthly consumer price increases in March and April 2018 do not exceed 2 percent in total. Otherwise, it will be a dream to see the annual inflation rate in 2018 as a single digit.

If the inflation rate for March 2018 is announced over the 1 percent threshold of March 2017—just as the İTO’s announcement of 1.2 percent—then hopes of an annual inflation rate below 10 percent will vanish.

The current account deficit is also high

Obviously, the recent increase in exchange rates will affect the price setting behaviors. Thus, we may expect price increases in March or April, as the lira loses value against the dollar.

In brief, exchange rates and inflation rates have taken a spiraling course, feeding off each other.

The current account deficit rate, which has been on the rise on par with inflation rates, will also affect the exchange rates. The data for March indicates the increase in exports has been continuing. It is well known that the increase in exports fuels a faster course of increase in imports in Turkey. It seems like another indicator of the rise in the foreign trade deficit and the current account deficit.

Most of the market players expect the dollar exchange rate to exceed 4 liras again because there have not been any changes forecasted in the trend of rising inflation and current deficit rates.

Meanwhile, it will not be surprising to witness another heated debate on the interest rates of the Turkish Central Bank, as the rise in exchange rates continues. An upsurge in the exchange rates before the Monetary Policy Committee (PPK) meeting on April 24 may necessitate an increase in the interest rates set by Turkey’s Central Bank. Despite the intensifying remarks from the government, which say the opposite, if there is a very fast hike in exchange rates, there may be an extraordinary PPK meeting to increase interest rates.

Any negative external effects would raise expectations for exchange and interest rate hikes.