Probably the lowest rate in inflation

Turkey’s recent inflation figures gave us all a positive surprise. However, the general consensus in the market is that it is highly likely that we saw the lowest annualized inflation rate as of the end of November for a while, and that inflation will increase from now on. 

According to Turkish Statistical Institute (TÜİK) data, the consumer price index (TÜFE) in November on an annual basis was around 7 percent, despite expectations of 7.4 percent. Lower than expected increases in food and core inflation rates have been effective in this.  

On the other hand, the effect of both the sharp hike in exchange rates, fuel price rises associated with world oil prices, and exchange rates – as well as tax rises on both cigarettes and liquor - is expected to be seen from December. In other words, starting from December, in the coming three to four months the expectation that annual inflation rates will constantly rise is very high.   

Market analysts are expecting TÜFE-based inflation to be between 7.5 percent and 8 percent for the year 2016. After this, it is estimated that increases will continue in the first two or three months of 2017, causing inflation to climb to 9 percent. 

We cannot say local and foreign analysts are making cautious interpretations. If exchange rates continue in their current course, personally I also think it is highly probable that inflation in 2017 will again rise to double-digit figures. 

Analysts agree that the sharp recent decline in the value of the Turkish Lira has not yet been reflected in prices. They also predict that this decline will continue because of the flight of foreign capital amid the U.S. Federal Reserve’s interest rate hike, in addition to the erosion of confidence in the Central Bank and the serious domestic and international political risks. This is why they are predicting that the increase in inflation rates will continue. 

Central Bank relieved?  

Along with inflation rates, the interest rate hikes of the Turkish Central Bank have again become a topic of discussion. Some analysts say that the lower than expected inflation rate eased pressure on the Central Bank for interest hikes. It is also said the third quarter growth figure disclosed next week may be lower than expected, even in negative figures, and this may be seen an obstacle to an interest rate hike. 

So the Central Bank faces a tough decision in its Monetary Policy Board (PPK) meeting scheduled for Dec. 20. Despite current figures being relatively good, the fact that the inflation rate is expected to increase makes the Bank’s interest rate decision tougher.  

Foreign analysts writing before the latest inflation figure was disclosed were saying that the Central Bank might have to schedule an extraordinary meeting without waiting for the PPK meeting in order to re-increase the interest rate. 

There are economists who maintain the same opinion in the new situation. There others who believe the government will increase its pressure on the Bank to reduce interest rates. The latter being the case, the Bank will do as much as possible to resist increasing the interest rate.