The further rise in Turkey’s headline inflation rate, to 14.6% y/y in December, is unlikely to be enough to push the central bank (CBRT) towards additional monetary tightening. Even so, with the CBRT keen to restore its battered credibility, interest rates will probably be left unchanged for most of 2021.
Inflation rises further, but further rate hikes seem unlikely
- The further rise in Turkey’s headline inflation rate, to 14.6% y/y in December, is unlikely to be enough to push the central bank (CBRT) towards additional monetary tightening. Even so, with the CBRT keen to restore its battered credibility, interest rates will probably be left unchanged for most of 2021.
- The outturn was up from 14.0% y/y in November (see Chart 1) and stronger than the consensus forecast collected by Reuters of 14.2% y/y. On a month-on-month basis, which tends to be volatile due to seasonal effects, consumer prices rose by 1.3%.
- December’s rise in inflation was fairly broad-based. The biggest jump came in furnishings inflation, from 14.2% y/y in November to 18.0% y/y last month. (See Table 1.) This directly contributed 0.3%-pts to the rise in the headline rate and probably reflects the effects of previous falls in the lira as well as a shift in demand away from services and towards goods that has been a key feature of the coronavirus crisis.
- Transport inflation also jumped to record its highest reading in more than two years as the recent increase in global oil prices pushed up local fuel prices. Partially offsetting this, food inflation dropped back and clothing inflation dipped into negative territory for the first time since 2009. Overall, though, core inflation rose from 13.3% y/y in November to 14.3% y/y in December.
- We doubt that the further rise in headline inflation in December will be enough to persuade the central bank to hike interest rates again this month. The CBRT’s decision to raise rates by an additional 200bp, to 17.00%, last month seems to have convinced investors that the shift to orthodox policymaking is here to stay and the lira has continued to strengthen. This will help to limit any further rise in inflation.
- What’s more, the economic outlook has worsened. The country entered the New Year in a full nationwide lockdown and, while daily new COVID-19 infections have dropped, restrictions will probably stay tight. This, coupled with the sharp credit slowdown, means that the economy is likely to suffer a fresh downturn.
- While the CBRT is unlikely to deliver further rate hikes, monetary conditions will probably be kept tight for a prolonged period. We expect the one-week repo rate to be left at 17.00% throughout much of 2021.
Chart 1: Turkey Consumer Prices (% y/y)
Sources: Refinitiv, Capital Economics
Table 1: Turkey Consumer Prices
Source: Turkstat. Note: Core inflation excludes food and beverages, tobacco, energy and gold prices.
Jason Tuvey, Senior Emerging Markets Economist, firstname.lastname@example.org