Hours ago TurkStat released the new inflation measure, namely seasonally adjusted monthly inflation as MoM, substantially higher than the headline of 1.03% for December. The most commonly used core indicator C rose 2.74% for the month.
The high print on seasonally adjusted inflation will not stop Central Bank of Turkey from cutting rates a second time in its January meeting, but if the new measure continues to rise because of sundry hikes to prices and incomes across the board further monetary easing may be in jeopardy.
Will Turkey reach CBRT target of 21% CPI by end-year 2025? BBVA Garanti and Gedik Invest don’t believe so.
BBVA Garanti’s 2025 CPI forecast
We calculate that the underlying trend inflation (3-month average of seasonally adjusted monthly inflation) improved to 2.35% in December (vs. 2.64% prev.) on the back of considerable improvement in food prices driven by fresh fruit and vegetable category, while the monthly improvement in core prices was relatively more limited.
Slight acceleration in clothing and durable goods limited the improvement in basic goods inflation, whereas services prices slowed down especially on the back of the retreat in rent inflation.
Cost push factors remained weak based our trend calculation but are relatively higher than what headline PPI implies (0.40% m/m and 28.5% y/y). Furthermore, 30% minimum wage hike points that the upside pressure on costs in the short run may remain lower than our previous expectations.
Our expectation of some improvement in annual inflation in the first quarter could create room for CBRT to continue to easing cycle, we believe that a cautious stance should persist, ensuring sufficient positive real interest rates to maintain the attractiveness of TL assets.
Despite the recent downside risk stemming from lower than expected minimum wage adjustment and the likelihood of some administered price adjustment to be subdued, unanchored high inflation expectations, strong inertia, the high possibility of real interest rates being lower than our expectations, and uncertainty regarding the magnitude of fiscal policy support could be upside risks, motivating us to maintain our year-end 2025 inflation forecast at 26.5%.
Gedik Invest: CBRT is likely to continue rate cuts in January with the continued softening in services inflation
In summary, today’s data strengthens the CBRT’s hand in continuing its rate-cutting cycle, which began in December. We anticipate a 150-250 basis point rate cut at the January 23 Monetary Policy Committee (MPC) meeting, with a bias toward the upper end of this range. Inflation data for January, which will be released following this meeting, is likely to be a critical determinant of the trajectory of future rate cuts. Given our expectation of continued short-term real appreciation of the Turkish Lira, we anticipate CPI inflation to decline to 37-38% by the end of Q1 and to 33-35% by mid-year. During this period, we anticipate that the CBRT will aim to provide an ex-post real policy rate of 300–400 basis points above the prevailing inflation rate.
For a sustained disinflation process, improvements in service inflation will be critical alongside exchange rate stability and reductions in core goods inflation.
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