In December, Turkey reported an inflation rate of 1.03%, a figure that pleasantly surprised many analysts who were forecasting a rise to as much as 1.6%. This dip signals a significant moderation from prior expectations, particularly considering the Bank of America’s (BofA) estimation of 1.5%. The compelling factors behind this decline primarily hinge on a notable decrease in unprocessed food prices, which underscores the volatile nature of food inflation that has mirrored broader economic trends throughout the year.
The decrease in food prices, notably fresh fruits and vegetables, which fell by 1.7% month-over-month, plays an essential role in this moderation of inflation. In previous months, food inflation had surged, clocking in at 5.1%. The sharp decline to 1.3% not only alleviates pressure on household budgets but also reflects seasonal adjustments and agricultural trends that can shift dramatically due to climatic or logistical factors. Alongside food inflation, services inflation also saw a reduction, declining to 1.1% from 1.6%, indicating a broader trend of easing across various sectors of the economy.
Regarding the core B-index, which discounts volatile food and energy prices, the inflation rate also moderated to 1.2%, providing further evidence of cooling inflation pressures. The BofA noted a seasonal adjustment, revealing that headline inflation on a quarterly basis in Turkey eased to an average of 2.4% in the fourth quarter, down from 3% in the preceding quarter. This data is both reassuring and indicative of the potential for stabilized economic conditions moving forward, given the domestic challenges Turkey faces.
The recent adjustment to the minimum wage posed relatively limited upward pressure on inflation forecasts, primarily due to the adjustment being at the lower end of expectations. According to BofA’s analysis, if future price adjustments are made anticipating inflation rather than being based on retrospective indices, it could offer a more stable environment for managing inflation rates. This subtle yet critical detail highlights how economic policies and external pressures shape inflation trajectories.
As for monetary policy directions, BofA advocates for the Central Bank of the Republic of Turkey (CBRT) to sustain its current trend of monetary easing through further interest rate reductions. Following a notable cut of 250 basis points in December, additional reductions are anticipated in the months ahead, particularly with a projected cut of the same magnitude in January. The forecast aims for the policy rate to plummet to 30% by the year’s end through additional cuts, which reflects an aggressive approach to maintain negative real interest rates conducive for investment and economic activity.
Looking ahead, BofA maintains an optimistic tone regarding the Turkish lira (TRY) as long as the positive real interest rates are upheld. Nonetheless, the path for appreciation may become less pronounced if inflation continues its downward trajectory. Consequently, BofA has updated its year-end exchange rate forecast for USD/TRY, projecting a value of 41 as opposed to a previous estimate of 44, illustrating confidence in gradual stabilization. Overall, while challenges remain, the current trends in inflation and monetary policy position Turkey on a cautiously optimistic path.