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February inflation higher; further rate cuts? Why not.

Despite double-digit inflation Turkey's central bank is likely to continue with muted rate cuts; and why not after all given the political pressures on the central bank to stimulate growth at all costs.

February inflation higher; further rate cuts? Why not.

The announced February CPI inflation beats the expectations for the better, yet nonetheless CPI inflation remains high in double digits. The fact that both the core inflation and the producers’ prices are rising along with headline CPI inflation, and the Turkish lira depreciation of more than 3% over the past two weeks places the end of year 8.2% inflation expectation of the government to the unattainable territory. 

Given the feared coronavirus affects across the global economy and the piling up expectations for a greater action from the major central banks, Turkey’s central bank could as well continue with further mild rate cuts until the policy rate reaches single-digits as per the wishes of President Erdogan. 

Yet, fragility is rising.  6.0% GDP growth recorded at 4Q19 and the PMI figures for January-February 2020 show that growth remains intact- at least for the moment.  Thus, the lira weakness will be passed on to the end prices in the coming few months.  Headline CPI inflation will get worse towards 13-15% range before lira stabilizes and growth weakens in the second half of the year.  Thus, despite double-digit inflation Turkey’s central bank is likely to continue with muted rate cuts (10.75% currently); and why not after all given the political pressures on the central bank to stimulate growth at all costs. 

Here are the details of February 2020 inflation: 

Turkey’s February consumer price inflation (CPI) is 0.35% that is below the average market expectation of 0.67%; yet strong enough to keep the annual figure in double digits at 12.37%.  In January annual CPI inflation was 12.15%.  On twelve months moving averages, CPI inflation is 13.94% as of February 2020.

Annual rate of changes in CPI (%), February 2020

In February 2020, while seasonal sales helped with a 4.83% drop in the clothing sector prices (annual 5.98%), the main drivers of February CPI inflation stand out as food and non-alcoholic beverages with 2.33% (annual 10.58%), health with 2.03% (annual 13.58%) and education with 0.86% (annual 14.23%).

In February 2020 within average prices of 418 items in the index, the average prices of 146 items decreased and the average prices of 24 items remained unchanged while the average prices of 248 items increased.

Core inflation far from diverging to single digits

Core  CPI B index on annual basis increased to 11.1% from 10.93% a month ago, while CPI-C index also advanced to 9.97% from 9.88% in January.

Producers’ prices heading to double digit too

D-PPI (2003=100) increased by 0.48% on monthly basis and advanced to 9.26% on annual basis, up from 8.84% a month ago. On twelve months moving averages basis, D-PPI is now at 14.18%.

The relatively tame monthly D-PPI owes to the global decline in the price of oil amidst slow growth fears linked to coronavirus effects, as the monthly drop in the coke and refined petroleum products was 8.96% (annual 3.22%).  While Turkish lira weakened throughout February, the remaining sub-sectors of D-PPI showed a wide range of increase with metal ores rising 3.36% in February solely (annual 20%).

GA.

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