Actions Speak Louder Than Words
Inflation rate for February, the shortest month of the year, is being released today. But before that, inflation data was published by Istanbul Chamber of Commerce (ITO) on Friday. Today everyone will be looking forward to TurkStat’s data.
According to market surveys, no matter what figure comes out, CPI will turn out to be the highest in 15 months on an annual basis. My expectation is 4% monthly inflation, just as shown in the ITO figures.
Although there are expectations that inflation will decline from now on, this will not be possible due to the base effect. On the contrary, we will go through a period of significantly high monthly inflation.
As I have mentioned in previous articles, the Central Bank should avoid making a rate decision before seeing the 12-month CPI, which had started in June last year and will end in May this year. However, something me tells me that the monthly inflation numbers, which will be quite low thanks to the TurkStat, will help the CBRT give the “inflation entered a downward trend” message to the markets at the beginning of this summer. Later, we can expect a rate cut before the autumn.
As changes both in the cabinet and the central bank are likely to happen after the elections, I do not think that nor the CBRT Chair nor his Vice Chairs will be able to resist the government pressure originating from the situation in the real sector. Those in the central bank management would do what is expected of them if they want to remain in office. Those who resist will be replaced. Interestingly, rate cuts could create an excuse for the high level of exchange rates that are no longer possible to be kept in check. This could also help relieve the markets of stress. But obviously, it would be inevitable for interest rates to rise again.
In fact, the most appropriate solution would be to interest rates above the expected inflation level and eliminate the pressure on exchange rates. As long as the government avoids doing this, interest rates and foreign exchange will rise eventually and rapidly. It would be best if they were liberated now to avoid seeing both climb to higher levels.
