103/07/19OkanErtem,SeniorEconomist|TurkEkonomiBankA.S.Turkey–FallingfromthetopoftheCPIwaterfallKEYMESSAGESWeseeJune’sCPIdataassupportingourbelow-consensusforecastthatTurkey’scentralbankwillstartacuttingcyclewith100bpatthe25Julymeeting.CurrentCPItrendspointtomoreaggressiveratecuts;weexpect400bptobringtheyear-endrateto20%.TopoftheCPIwaterfall:Turkey’sJuneCPIcameinat0.03%m/m,closetoour0.05%forecast,comparedwiththeBloombergconsensusof0.20%.Thefallto15.7%y/yfrom18.7%inMaysignalstheaccelerationofaCPIdowntrend.Foodprices(whichcontributedwithaboutathirdoftheyear-to-dateannualinflation)havestartedtonormaliseandcoregoodsCPIalsobegantoshowsignificantimprovement,whichsignalsFXpass-througheffectsfizzlingout(seeFigure1).Eventhestickiestcategory,servicesinflation,deceleratedto14.92%from15.15%.WeseethisasamajorsupporttoourexpectationofCBRTratecuts.DisinflationtohaltinJuly:Weestimatevariousrecentpricehikesaimedatrepairingthebudgetdeficitwilladd153bptoJuly’smonthlyCPIinflation:contributionsof12bpfromfood(sugarandtea),5bpfromenergy(gasolineanddiesel),44bpfromutilities(electricity)and92bpfromtaxcutreversals(autos,furnitureandwhitegoods).Evenwiththehikes,therealCBRTpolicyratemightstayaround7%inJuly,pavingthewayforratecuts(seeFigure2).Favourablebaseeffects,duetoweakdomesticdemand(preliminarytradenumbersforJuneindicate23%y/ydeclineinimports)andlowerFXpassthrough(declineinalmostallcorecategories),supportthedownwardCPItrendinQ3.Onbalance,therefore,weforecastCPIbottomingat11.5%inOctober.InflationarypressuresmightshowsomeresilienceinQ4,asbaseeffectswashout.WethinkannualCPIwillendtheyearatabout16%,butseetheriskasbeingtothedownside.Roomforplentyofmonetaryeasing:TheinflationtrajectorygivestheCBRTroomforfurtherratecuts,inourview.WecontinuetoexpecttheCBRTtostartitseasingcyclewitha100bpcuton25July,withaseriesoffurthercutsbringingthepolicyrateto20%bytheendoftheyear.Fig.1:CPIacrosscorecategories(annual,%)Fig.2:CPI(%y/y),CBRTpolicyrateandrealrateforecast(%pa)Sources:Turkstat,TEBSources:Turksta...
