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Turkey Desknote Summary

Core Content

This document is a market analysis report by Turk Ekonomi Bank A.S. and BNP Paribas, focusing on Turkey's inflation trends and potential central bank policy responses in late 2017 and early 2018. It outlines the current state of inflation, the likely trajectory, and the implications for monetary policy and the Turkish Lira (TRY).

Key Inflation Data

• October 2017 CPI Increase: Consumer prices rose by 2.1% month-over-month (m/m), exceeding the market consensus of 1.9% and close to the forecast of 2.0%.
• Year-over-Year Inflation: The headline inflation rate increased from 11.2% in September to 11.9% in October.
• Revised End-Year Forecast: The end-2017 inflation forecast has been revised up to 11.2% from 9.8%, while the end-2018 forecast remains unchanged at 8.8%.
• Core Inflation: Core C inflation rose to 11.8% y/y in October, the highest since January 2004.
• Services Inflation: Services inflation remained at 9.6% y/y, with rent inflation unchanged at 9.1%.

Inflation Trends and Diffusion Index

• Trend Inflation Indicators: The CBRT's inflation report indicates that core C inflation trends are expected to rise over 1 percentage point to 14.1% y/y, while services inflation trends are expected to ease slightly to 9.3% y/y.
• Diffusion Index: The diffusion index of prices continued to increase, with 78% of non-food items in the inflation basket seeing a price rise in October. The 12-month average reached 68.4%, the highest since January 2014, showing rising inflation momentum.

Currency and Central Bank Policy

• TRY Depreciation Impact: The depreciation of the Turkish Lira is expected to increase upward pressure on headline inflation, with a peak likely slightly above 12% in November.
• Base Effects: Headline inflation is expected to decline from December onwards due to base effects.
• Government Actions: The government's decision to skip the January tobacco tax hike is anticipated to support short-term inflation decline.
• Repo Funding Rate: The current average repo funding rate is around 12.0%, slightly below the 12.25% late liquidity window rate. If the CBRT imposes further limits on ON repo funding, the average repo rate could approach 12.25%.
• Policy Outlook: The chances of the CBRT tightening liquidity conditions have increased. However, the central bank may wait for inflation to rise above 12% in November before taking action.

Subjective Probability

• The subjective probability of the CBRT tightening liquidity conditions on Monday is estimated at 50%.

Contacts

Legal Notice Highlights

• The document is non-independent research and is intended for marketing purposes.
• It is not investment research under MiFID.
• No liability is accepted for any reliance on the information or opinions contained in the document.
• Confidentiality is emphasized, and the document should not be distributed without prior consent.
• Performance data may be based on back-testing and is not guaranteed to reflect actual market conditions.
• Conflicts of interest may exist, and BNP Paribas may engage in transactions inconsistent with the views expressed in the document.

Disclaimer

• The document is for informational purposes only and does not constitute an offer to sell or purchase any financial instruments.
• No guarantees are made regarding the accuracy or completeness of the information.
• Past performance is not indicative of future results.
• Transactions may involve high risk and volatility.

Jurisdictional Disclosures

• United States: Options and ETFs are complex and may involve high risk.
• UK: The document is communicated by BNP Paribas London Branch.
• France: Produced and/or distributed by BNP Paribas SA and BNP Paribas Arbitrage.
• Germany: Distributed by BNP Paribas S.A. Niederlassung Deutschland.
• Belgium: Authorized and supervised by ECB and National Bank of Belgium.
• Ireland: Distributed by BNP Paribas S.A., Dublin Branch.
• Italy: Distributed by BNP Paribas Italian Branch (Succursale Italia).
• Netherlands: Distributed by BNP Paribas Fortis SA/NV, Netherlands Branch.
• Portugal: Distributed by BNP Paribas - Sucursal em Portugal.

Conclusion

The report highlights rising inflation pressures in Turkey, driven by tax cuts on white goods and currency depreciation, with a revised end-2017 inflation forecast of 11.2%. The central bank's potential tightening of liquidity conditions is under consideration, with 50% subjective probability of action. The diffusion index shows increasing inflation momentum, and core inflation is at a multi-year high, while services inflation remains elevated. The report concludes with important legal and jurisdictional disclaimers.