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Turkey: Finally some good news on inflation
Mon, Jun 4 2007, 14:40 GMT
by Lars Christensen
Turkey’s State Institute of Statistics has published the May inflation numbers. Turkish consumer prices (CPI) came out at 9.23% y/y (0.50% m/m) - below the consensus expectation of 9.6% y/y. Similarly, producer prices (PPI) were up 7.14% y/y (0.39% y/y) in May - also below the consensus expectation of 7.4% y/y. The downward surprise on CPI mostly reflects lower-than-expected food prices. Over the last couple of months food prices have surprised a bit on the upside - in May we saw a bit of a “mean-reversion” in the food prices.
Overall, this is good news and inflation should drop further in the coming months, but inflation is still likely to remain elevated and significantly above the Turkish central bank’s (TCMB) official inflation target of 4% by the end of the year. We now see inflation around 7-7½% by the end of the year. However, we would caution that if we see a weakening of the lira this could change the outlook for inflation in a negative direction. Hence, we see more upside risk than downside risk to our inflation forecast. We therefore also think that there will not be room for rate cuts this year in Turkey even though TCMB has become move dovish under Mr. Yilmaz’s leadership. It is notable that Turkish yields were more or less unchanged after the publication of the better than-expected inflation numbers. This could be an indication that the bull run in the Turkish fixed income markets is losing a bit of steam - or more likely that the markets are not overly surprised by the numbers.
In conclusion, the inflation numbers are good news, but not good enough to make us bullish on the Turkish fixed income markets given the fact that the markets are already priced for a fairly large drop in inflation.
Published on Mon, Jun 4 2007, 14:40 GMT
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