CBRT expects inflation to decelerate to 8.5 pct by end-2017 and to 6.4 pct by 2018

Turkish inflation decelerated in May. Pass-through from the TRY sell-off explains the bulk of the inflation rise since November and the Turkish lira is also the wild card for the inflation outlook, noted Nordea Bank. Inflation inched lower in May after having risen nearly 5 percentage points since November 2016. The next few months might see inflation decelerating just a bit more, but a major decline in inflation should not be expected until the end of this year and the starting of 2018.

Consumer price inflation dropped marginally to 11.7 percent in May from April’s 11.9 percent. Producer prices alleviated slightly more, but stayed at a higher level. The Central Bank of Turkey is expected to be proven right regarding inflation peaking in April/May.

Looking at the monthly changes, positive base effects are expected to take inflation slightly lower in months ahead, whereas the more considerable base effects from the Turkish lira sell-off are not expected to show until later in 2017.

But inflation expectations have become more unanchored. Therefore, consumers’ inflation expectations now considerably exceed even the upper end of the central bank’s uncertainty band around the inflation target.

Therefore, inflation is not expected to return to the levels prior to the sell-off unless the CBRT is permitted to keep monetary policy tight when inflation begins moving lower, to gradually re-anchor inflation expectations around the target, stated Nordea Bank. The central bank expects inflation to fall to 8.5 percent at the end of this year and to 6.4 percent at the end of next year.