January CPI inflation came in at 5.03% MoM, well above the median market forecast of 4.3%. Despite this upside surprise, the annual CPI inflation rate eased to 42.1% (market expectation: 41.3%) from 44.4%, given the base effect from the 6.7% reading in January 2024.
Meanwhile, core CPI inflation (Group C) stood at 5.6% MoM (January 2024: 7.6%), bringing the annual rate down from 45.3% to 42.6%. On the producer side, domestic PPI inflation remained relatively contained, supported by currency stability and moderating global commodity prices, registering 3.06% MoM. The disinflation trend in PPI inflation, which started from 57.7% in May 2024, persisted, with the annual rate declining further from 28.5% at end-2024 to 27.2%.
Gedik Invest commented: “The primary driver behind the upside surprise in headline inflation was the services sector. We had anticipated a lower print, given the postponement of various price hikes on tobacco, public transportation, and utilities. However, even in the absence of these adjustments—and despite a 5.2% seasonal decline in clothing prices—monthly CPI inflation still printed at 5.0%, indicating an unfavourable outlook”.
According to Gedik analysts, “February inflation becomes even more critical for CBRT’s rate cut decisions. In sum, a 5.0% MoM CPI inflation print—even before the anticipated price hikes in tobacco, public transportation, and energy—paints a challenging inflation outlook.
Considering historical trends and the anticipated pass-through of delayed price adjustments, we tentatively project February CPI inflation in the 3.0-3.5% range, which would bring annual CPI inflation down to 40-41%. As such, we think that while today’s inflation data may not derail CBRT rate cut expectations, it could lead to a more measured pace of easing”.
AGBİ/ William Sellars: Will Central Bank dare cut rates?
A sharp jump in costs may hinder the Turkish government’s hopes of delivering further interest rate cuts, with inflation in the services sector, housing costs and food combining to pressure the consumer price index, wrote William Sellars for AGBİ.
While year-on-year inflation was at 42 percent, down from 44, this was still higher than many forecasts and weakened the case for a further round of interest rate cuts by the Central Bank of Turkey.
The central bank had reduced its main lending rate by 5 percent over the past two months to 45 percent on the back of falling inflation and the anticipation of a further slowing in price rises.
One factor driving up the January inflation figure was the traditional rise in state taxes and levies, with increased charges for many services announced at the start of January.
Many of these increases flowed on to the services sector, according to economist Mustafa Sönmez, pushing up the costs of health and education among others.
“However what one must pay attention to, are hardened issues such as rent and food costs, which are not coming down,” he told AGBI. “This is a warning sign for those who claim they have broken the back of inflation.”
For the key manufacturing sector, the monthly increase was 3.25 percent, with inflation cited by the Istanbul Chamber of Industry (ISO) in its January purchasing managers index report as being one of the core factors in a fall in output for the month.
“Higher input prices reflected a range of factors, including rising costs for raw materials and fuel, increased wages and currency weakness,” the ISO report said.
The central bank will have to weigh sticky inflation against still high borrowing costs when it meets in early March to review its rates policy, said Sönmez. “I believe that February’s inflation will be high as well, so the central bank will also look at next month’s inflation data when it makes its decision on March 6,” he said.
“It will look at annual inflation currently at 42 percent and its policy interest rate of 45 percent. However, there will be pressure from the government to have a rates cut of around 2.0 to 2.5 percent regardless of the data.”
Bloomberg: March rate cut still in play
Many traders expect the central bank to cut by 250 basis points at each of its seven remaining monetary policy committee meetings this year.
Monday’s data raises some questions over whether policymakers can deliver on that, though the fact there’s isn’t another MPC meeting until March 6 plays into their hands.
“We’re not seeing risks to rate cut path for now as things will likely calm down by March meeting,” said Onur Ilgen, head of treasury at MUFG Bank Turkey in Istanbul.
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