Inflation to peak at over 30%: Marking to marked the most recent move in TRY, we revise our inflation forecasts. The most important assumption is TRY: we assume USDTRY at an average 13 in December and January, and at 14.5 at the end of 2022 corresponding to 11.6% y/y rise over 2022. Based on this, we expect the impact of recent FX moves to start to show up in inflation in December when we expect CPI to 25.5% y/y. For 2022, we expect CPI to peak at 31.4% y/y in May before decelerating gradually to 21.8% y/y in December 2022.
We expect a 200bp policy rate cut on 16 December meeting: Despite ongoing deterioration in inflation and elevated TRY volatility, the authorities are sounding dovish and consider the current inflation levels as transitory and TRY volatility/level as irrational. This suggests to us that there is a determination to continue the easing cycle. Despite additional commitments from public authorities, one critical question, in our view, is what is a low interest rate – 12%, 8% or 5%? If we assume 12% as the initial target, the ex-post real policy rate would fall -19% in Q2 22, its lowest ever in Turkey and probably in any other country in the post-2000 period.
Based on current communications by the authorities, we expect an additional 300bp cut in the near term to 12%. We expect a 200bp cut on 16 December followed by a 100bp cut in January 2022. However, ongoing excessive TRY volatility makes it quite difficult to have a strong view for the medium term.
By Ercan Adıguzel
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