Sharp decline in Turkey inflation strengthen possibilities for rate cuts

Turkish CPI inflation moderated sharply from 8.8%yoy to 7.5% in March, mainly due to a sharp decline in food prices, according to official data released on April 4. While this sharp drop was not matched by core inflation, core dynamics are improving also -- core inflation softened from 9.7%y/y to 9.5% in March.

"Our calculations suggest that the effects of past lira depreciation are finally reducing in significance. Our models suggest that headline inflation will moderate further, to below 7% over coming months, before re-accelerating in 2017." said Commerzbank in a report

Better headline inflation readings could raise political pressure on the new CBT management to ease rates by a large margin. Growth rate was 5.7 percent above the expectations in the last quarter of 2015 while the total growth throughout the year reached 4 percent. Given the favorable conditions accompanying the decreasing trends in annual inflation, analysts expect a reasonable decrease in the marginal funding rate.

“This reading supports a policy that might continue making moderate cuts to the overnight rate,” said Odeabank economist Sakir Turan.

However, the key to maintaining good inflation dynamics would be for the Central Bank to maintain conservative monetary policy so that the lira remains stable and does not reverse its recent gains. Easing rates by a large margin would expose the currency to the next swing in risk appetite.