Turkey’s core inflation to moderate slightly in 2016, but likely to accelerate again in 2017

In the coming months, Turkey’s headline inflation is likely to moderate below 7%, according to Commerzbank. It is expected to reach a bottom in the third quarter. Core inflation is also likely to slow down but by less. It is expected to decelerate to 8%-8.5% in the second half of 2016 and then slowly accelerate again in 2017, added Commerzbank. Turkey’s inflation is slowing mainly due to the impact of a stable lira and lower commodity prices. However, prices of commodity have started to stabilize and the US Fed is expected to get back to tightening its policy this year.

“From a sensitivity analysis standpoint, all it would take to generate 15% yoy imported price pressure next year are: $45/bbl crude oil price by end-2016, and mild lira depreciation of 3%-4% – which implies USD-TRY at c.3.00, nothing dramatic”, said Commerzbank.

This indicates that in 2016, Turkey’s core inflation might moderate; however, it will be quite early to ease policy extremely, added Commerzbank. The reason for Turkey’s high inflation is possibly structural, and thus higher interest rates will also not help decelerate it. Most of the high inflation seen in Turkey was due to pass-through from TRY’s weakness, according to Commerzbank. If there were no big exchange rate shock in the recent years, inflation in Turkey would have been consistent with inflation of other emerging nations, noted Commerzbank.