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Turkey Desknote Summary (03 November 2017)

Core Content

This document is a market analysis and forecast from BNP Paribas regarding Turkey's inflation and monetary policy outlook for the end of 2017 and early 2018. It is authored by H. Erkin Isik, CFA, and focuses on Consumer Price Index (CPI) trends, Central Bank of the Republic of Turkey (CBRT) policy decisions, and the implications of the Real Effective Exchange Rate (REER).

Key Inflation Data

• October CPI Increase:

  • Consumer prices rose by 2.1% month-on-month (m/m), above the market consensus of 1.9% and close to the forecast of 2.0%.
  • Year-on-Year (y/y) headline inflation increased from 11.2% in September to 11.9% in October.

• Core Inflation:

  • Core CPI (excluding food and energy) rose to 11.8% y/y, the highest since January 2004.
  • Core C inflation (a trend indicator) increased to 14.1% y/y, above the previous peak of 13.5% in March.

• Services Inflation:

  • Services inflation remained at 9.6% y/y, with rent inflation unchanged at 9.1% y/y.
  • Services trend inflation eased slightly to 9.3% y/y from 10.0% y/y in the previous month.

• Diffusion Index:

  • The diffusion index of prices increased, with 78% of non-food items in the inflation basket seeing price rises in October.
  • The 12-month average of the diffusion index reached 68.4%, the highest since January 2014, indicating increasing inflation momentum.

Inflation Outlook

• 2017 Forecast:

  • The end-2017 CPI forecast has been revised up to 11.2% y/y, from 9.8% y/y previously.

• 2018 Forecast:

  • The end-2018 CPI forecast remains at 8.8% y/y.

• Headline Inflation Trends:

  • Headline inflation is expected to peak slightly above 12% in November due to the TRY depreciation.
  • From December onwards, headline inflation is likely to decline due to base effects.
  • Q1 2018 inflation is expected to fall below 9.5% y/y, aided by the government skipping the January tobacco tax hike.

CBRT Policy Outlook

• Liquidity Tightening:

  • The chances of the CBRT tightening liquidity have increased.
  • The repo funding rate is expected to rise closer to 12.25% if the CBRT imposes further limits on ON repo funding.

• Current Repo Rate:

  • The average repo funding rate is around 12.0%, slightly below the late liquidity window rate of 12.25%.

• Subjective Probability:

  • The subjective probability of tightening in November is 50%, as the CBRT may wait for inflation to rise above 12% before taking action.

REER and Currency Dynamics

• Real Effective Exchange Rate (REER):

  • The average basket TRY increased by 5% m/m in October.
  • The REER declined by 3% to 87.5, matching its lowest level since January.

• Currency Depreciation Impact:

  • The TRY depreciation is expected to continue putting upward pressure on inflation.
  • The CBRT is unlikely to react immediately due to base effects and short-term support from the tobacco tax exemption.

Contacts for Emerging Markets Strategy

Legal and Regulatory Notice

• This document is non-independent research and not investment research under MiFID.
• It is intended for professional clients and may not be suitable for retail investors.
• Confidentiality: The document is provided confidentially and may not be distributed without prior written consent.
• Conflict of Interest: BNP Paribas may have financial interests in the securities or companies discussed and may engage in transactions inconsistent with the views expressed.
• No Liability: BNP Paribas and its affiliates disclaim all liability for any use of the information or reliance on it.
• Performance Data: Any performance data is simulated or illustrative and not guaranteed to reflect actual results.

Disclaimer

• The information and opinions are based on public sources and may be subject to change.
• Indicative prices are not actual transaction terms and are based on internal models or price sources.
• No advice is given: This document does not constitute investment, financial, legal, or tax advice.
• Past performance is not indicative of future results.
• Transactions are subject to risk, including market, credit, and liquidity risk.