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The 1.64% MoM increase in CPI was far above the 0.9% market consensus.
Strong FX pass-through and some idiosyncratic factors, including a jump in egg prices, led to a much sharper-than-expected increase in headline CPI in December.
The recent increase in excise taxes on alcohol and tobacco and the recovery in global energy prices were the other factors behind inflation strength.
Due in part to a weak base, annual inflation jumped to 8.5% in December from 7.0% in November. Hence, the CBRT missed its 5%±2% inflation target for the fourth consecutive year.
Given the weakness in domestic demand and that the rise in inflation was due at least partly to one-off factors, we keep our end-2017 inflation forecast at 8.2%. Higher energy prices and the weaker-than-expected lira suggest the risks to this forecast are skewed to the upside. More important, although our year-end forecast has not changed, the expected inflation path has shifted up. We now expect yearly headline inflation to peak at 10% (prevıously 9.2%) ın April.
This inflation path likely will trigger a further rise in inflation expectations. The implied credibility loss, along with persistent political uncertainty, should increase the pressure on the CBRT. The Bank already sounds concerned by the recent lira weakness and its impact on inflation, financial stability, and consumer sentiment. However, its policy response is constrained by the weakening in economic activity and the political players’ demands for lower interest rates.
We’ve been constantly maintaining our long portfolios in USDTRY, please follow below weblinks for our previous write-ups on the bullish perspectives,
The above trades in our write ups have fetched the descent returns, rest is history. For now, as more bullish rout is on cards, we still uphold USDTRY 1x1 call spread with conviction (3.55, 3.8250), spot ref: 3.7650.
