Turkey inflation seen dipping to 36.1% in May, monthly rate 2%: Reuters poll

A Reuters poll forecasts Turkey's monthly inflation to be 2% in May, driven by higher clothing and fruit prices due to agricultural frost and seasonal changes, leading to an expected annual inflation rate of 36.1%. Economists anticipate automotive prices, influenced by currency volatility, to also contribute to inflation, although core inflation may see a more positive trend. Despite central bank measures, including rate hikes and FX interventions, economists have revised up year-end inflation forecasts amid concerns over FX-pass through, with the poll median predicting around 30% inflation by year-end, exceeding the central bank's 24% forecast.

Analysis

Turkey's inflationary pressures are expected to persist in May, with a Reuters poll forecasting a 2% month-on-month increase, primarily driven by anticipated rises in clothing and fruit prices, the latter impacted by agricultural frost projected to reduce fruit production by approximately 25%. While this monthly figure represents a deceleration from April's 3%, the annual inflation rate is anticipated to moderate to 36.1%. Automotive prices, sensitive to currency volatility, are also cited as an inflationary contributor. Despite these pressures, core inflation components such as household goods, health, and housing are expected to follow a more benign trajectory. The Turkish Lira experienced significant volatility in March, touching a record low against the U.S. dollar following political developments, which prompted the central bank to intervene by selling approximately $57 billion in foreign currency and implementing policy tightening amounting to 700 basis points. More recently, the central bank has been rebuilding its foreign exchange reserves, purchasing around $13 billion in the last three weeks, while maintaining overnight interest rates at 49%. Despite the central bank's year-end inflation forecast of 24% and its expressed readiness to tighten policy further if inflation worsens, economists polled project a higher year-end inflation rate of around 30%, revising their forecasts upwards since March due to concerns over FX pass-through, although lower global energy prices have somewhat tempered these upward revisions. The official May inflation data is scheduled for release on June 3.

Key Decisions for Investors

• Investors should closely monitor the May inflation data release on June 3, particularly the trajectory of core inflation and the specific impacts from clothing and fruit prices, to assess the efficacy of existing monetary policy measures.
• Given the persistent high inflation, ongoing currency volatility, and the significant divergence between economists' year-end inflation forecast (around 30%) and the central bank's target (24%), a cautious approach towards Turkish lira-denominated assets is warranted.
• Consider the potential for further policy tightening by the Turkish central bank, especially if upcoming inflation figures exceed expectations or if currency pressures intensify, as indicated by the Governor's statements.
• Factor in the impact of the central bank's recent FX reserve accumulation strategy on market liquidity and exchange rate stability when making investment decisions related to Turkey.