Turkey: Inflation to ease in August with rate cuts now likely in the fourth quarter – MUFG

Inflation in Turkey likely peaked in July 2021, according to analysts at MUFG Bank. Interest rate cuts before year-end remain their base case scenario. They see the key rate ending 2021 at 17% with risks tilted towards further easing. 

Key Quotes:

“Inflation in Turkey is expected to fall from 18.95% y/y in July to 18.75% y/y in August (consensus 18.73% y/y) owing to lower energy prices and due to the consumption tax cut for vehicles. Absent any unforeseen shocks, we forecast that inflation likely peaked in July but higher food prices still pose a risk. Looking ahead, we expect inflation to continue easing on the back of base effects, especially in November and December and end the year at 16.2% y/y.”

“From an aerial perspective, under a more conventional monetary framework, the ongoing deterioration in the inflation picture would likely require policy tightening. However, given the credit-fuelled, economic growth at all costs strategy of the CBRT, we continue to believe that the next rate move will be a cut, most likely in Q4 2021, possibly in November, when base effects are set to pull inflation down slightly.”

“Our base case forecast is for a cumulative 200bp cut before year-end, likely in two 100bp steps in November and December, taking the policy rate to 17.0%. The risk is skewed towards earlier easing, particularly if inflation starts to moderate sooner than expected (our forecast is for a rise in September to 19.3% y/y but to fall to December to 16.0% y/y) and the Lira (TRY) does not come under any significant pressure.”