No improvement in Turkish inflation outlook, CBT to have little room to relax monetary stance - Commerzbank

The Turkish inflation situation is barely rebounding. Consumer price inflation for the month of August disappointed. The consumer price inflation rose 1.1 percent sequentially after seasonal adjustment, while the core inflation rate reached 10.2 percent year-on-year. This occurred despite the lira having stayed stable and monetary policy having remained tight. This raises concerns that structurally high inflation expectations could be proving a major factor, noted Commerzbank in a research report.

However, there are some relieving developments. The effect of imported commodity price pass-through is waning due to the stable lira. If the commodity prices and lira were to remain unchanged from here, the pass-through impact would disappear by the end of the year. However, the outlook is cloudy; commodity pass-through has already lowered sharply in the past quarter – yet, wage hikes and domestic price pressure are making up for that.

This signifies that the Central Bank of Turkey will have very little wiggle room in the months ahead to relax its monetary stance, stated Commerzbank. The real interest rate has been positive in 2017 and this has protected the lira to some extend; however, higher inflation is already pulling the real interest rate down.

“This makes for a risky scenario in the event that major central banks tighten their policy stance via tapering or hiking rates”, added Commerzbank.

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