Turkey annual inflation seen at 32.6% in Aug, monthly rate 1.8%

A Reuters poll forecasts Turkey's August monthly inflation to slow to 1.79% and annual inflation to dip to 32.6%, down from July's 33.52%. This potential disinflation, if confirmed by the September 3rd data, could support further monetary easing by the central bank, with HSBC anticipating significant rate cuts by year-end, even as the poll's year-end inflation forecast of 30% remains above the central bank's target of 24-29%.

Analysis

Market expectations point to a continued disinflationary trend in Turkey, with a Reuters poll forecasting August's monthly inflation to slow to 1.79% and the annual rate to dip to 32.6%. This follows a period of extreme market volatility in March, which was contained by aggressive central bank intervention including rate hikes and $57 billion in FX sales. The central bank has since pivoted, initiating a 300 basis point rate cut in July and signaling a gradual slowdown in inflation. This has fueled expectations for further monetary easing, with HSBC projecting an additional 750 basis points of cuts by year-end, which would take the policy rate from 43.0% to 35.5%. However, a degree of risk remains, as the poll's median year-end inflation forecast of 30% is above the central bank's 24-29% target range, indicating that inflation could prove more persistent than official forecasts suggest.

Key Decisions for Investors

• Investors should closely monitor the official August inflation data release on September 3rd, as a print at or below the forecasted 1.79% monthly rate could reinforce the central bank's easing bias and act as a catalyst for a larger rate cut.
• Given the explicit pivot to an easing cycle, positions that benefit from falling interest rates, such as Turkish equities and fixed-income instruments, may be considered, but this potential must be weighed against the country's still-high inflation.
• The divergence between the market's 30% year-end inflation forecast and the central bank's upper target of 29% represents a key risk; investors should be cautious of potential currency volatility if inflation proves stickier than the central bank's optimistic outlook.