Markets before the inflation…

Although we were excited to hear last night’s breaking news from White House, EU and Russia, it looks like markets rather show a calm trend after the G-20 summit. So, today we’ll talk about inflation.

But before we get to it, I’d like to remind you of something: “According to experts, government won’t let exchange rate fall any further but markets always offer opportunities.” I’ve lost the count of how many times I’ve said these words over the last 10 years.

And as of the beginning of this week, markets did offer this opportunity. Exchange rates have drastically fallen. While exchange rates are keeping a rather fluctuating trend, BIST continues to rise. The fact that US-Turkey ties have been improving gave investors new hopes. Now, we are waiting for the release of June 2019 inflation rate data.

I believe Turkish economy will keep going until October without the help of base effect. I can also say that exchange rate rises in previous months and price hikes that entered into force right after Istanbul mayoral re-run will prevent inflation from falling as expected. There’s high likelihood that the current positive trend might last longer depending on a decrease at least by 2 basis points in inflation. If inflation rate falls within a bandwidth of 0% to 0.5%, even though it doesn’t turn out to be negative, inflation rate may just turn out to be 15.50-16.00%.

“Let’s not be too hasty; patience is a virtue…”

Such possibility I mentioned above may give CBRT a reason for taking action to cut interest rates. Although international institutions expect CBRT to cut rate by 900 bps before the end of 2020, I don’t think that CBRT will initiate a rate cut campaign without making sure of a permanent improvement in inflation. Considering the recent Reserve Funds and financial funds debates, CBRT would definitely act far more cautiously to preserve its credibility.

Even so, we should be prepared before monthly inflation rate turns out to be higher than expected since we can sometimes be fooled by our habit of looking at the “upper and lower limits of the prediction interval” in expectation surveys. As I’ve said, soon we’ll see the results of the impact of recent price hikes and increasing exchange rates on prices.

As I’ve mentioned above, another stimulus that might cause exchange rates to fall down can be the inflation rate scheduled to be released today. Be reminded that exchange rates will continue to show an upward trend unless Turkey’s economic fragilities are eliminated. If FX rates start showing a downward trend, such change would offer a great opportunity for those who stay in debt.