Turkish headline inflation to moderate further in coming quarters to below 7%

Turkey’s inflation moderated to 7.5% in March from 9.6% y/y in the start of 2016. However, decline in food price inflation to 4.6% from 12% in this period was mainly responsible for the deceleration in CPI inflation. More importantly is core inflation’s gradual peaking as the Turkish lira has been steady in the past quarter.

“Our models suggest that headline inflation will moderate further over the coming months to below 7%, but that core inflation will moderate by less”, says Commerzbank.

There is a threat that there will an increase of political pressure on the central bank to ease rates and that this might risk fledgling rebound in inflation dynamics. Full-year average inflation is expected to be 7.9% in 2016 and there is space for downside risk at the headline level, added Commerzbank. However, inflation is likely to rise again in 2017, added the bank.

“We forecast core inflation also to moderate, but by less, remaining close to 9% during most of 2016”, notes Commerzbank.

Meanwhile, headline inflation is likely to accelerate towards 9% in 2017, while lira is expected to moderately depreciate by 5%-6%. This might create 25% y/y import price pass-through, added Commerzbank.