Let’s not be too hasty on inflation expectations…

Each month, prior to make a decision, I wait for the statistics released by Istanbul Chamber of Commerce before the CPI data comes in. That’s how I know first if the inflation is going to decline.

This time, however, results seem a bit discouraging. Following a similar trend with the inflation rate for a while now, Istanbul Cost of Living Index seems to have increased by more than 2% in May, in which case, it seems unlikely that Turkey will be able to achieve 0.53% monthly CPI.

As you may remember, CBRT Chair Murat Uysal had revised its inflation expectation up to 7.4%, paving the way for interest rate cuts. However, it does not go unnoticed that prices have been going up lately in goods and services markets due to cost increases and other several factors.

That is why it I might find it a bit disturbing if inflation rate, which is scheduled to be released today, turns out to be lower than 0.50%. It is an undeniable fact that top goods and services with strong coefficients in the inflation basket have gained a certain upward momentum since April. In the meantime, the Chair of TurkStat was replaced and that’s a whole different story.

“CBRT should be careful now”

I would not be surprised to see that CPI data which will be announced today turn out not to be lower than 0.70% after the high figures of Istanbul Chamber of Commerce; however, it exceeds 1.50%, this would definitely mean that Turkish inflation rate has already got off course. Although inflation rate isn’t a crucial factor now, under the current circumstances, CPI numbers serve as a basis for future rate cuts. Now that CBRT has already started implementing negative real interest rates, I think I would not be wrong in saying that insisting on further rate cuts would put more pressure on Turkish Lira despite. This might be the reason why FX rates seem persistent to keep falling.

There is also the fact that Turkish Lira has sadly failed to follow the upward trend of developed countries’ currencies when they were gaining momentum against the US Dollar. If global tensions and conflict further escalate, Turkish Lira would be directly affected by the chaos. So, we need a substantial flow of foreign funds into Turkey, the sooner the better. In the meantime, financial markets must try to remain stable as much as they can, in order for the newly launched loan schemes of Public Banks can achieve their intended effect. Government should try to be more rational with its decision making if it wishes to collect loan debts.

If inflation rate turns out to be higher than expected today, CBRT will have to take a more rational and more understandable step in this month’s meeting in order to help financial markets achieve balance and stability.