BofA Anticipates Continued Easing of Inflation in Turkiye

BofA Anticipates Continued Easing of Inflation in Turkiye

Recent data reveals that Turkiye's inflation rate for December stood at 1.03%, a figure that falls below both the consensus estimate of 1.6% and BofA's forecast of 1.5%. The easing inflation can be largely attributed to a decline in prices of unprocessed food, especially fresh fruits and vegetables, which recorded a 1.7% month-over-month decrease following substantial rises in the previous months.

Food and Services Inflation Trends

Moreover, food inflation has slowed from 5.1% to 1.3%, while services inflation has seen a decrease from 1.6% to 1.1%. The core B-index, which excludes more volatile items from the calculation, exhibited a resemblance in trends, with a drop in monthly inflation to 1.2% from 1.5%.

Seasonally Adjusted Inflation Analysis

BofA economists underscored that when adjusted for seasonal factors, headline inflation in Turkiye averaged 2.4% during the fourth quarter, down from 3% in the third quarter. A corresponding decline was observed for the B-index, which fell from 2.6% to 2.4%.

Implications of Wage Changes

The report further elaborated on how the recent minimum wage increase aligns with BofA's inflation expectations, suggesting it poses a limited upside risk to their inflation forecast which stands at 25%. They argued that if administrative price adjustments align with anticipated inflation levels instead of being adjusted retrospectively, the pressure on inflation could diminish.

Monetary Policy Outlook

On the subject of monetary policy, BofA expressed their view that the Central Bank of the Republic of Turkiye (CBRT) should proceed with its strategy of monetary easing, considering further rate cuts. It was noted that the CBRT had already decreased the policy rate by 250 basis points in December, a move deemed predictable by BofA.

Future Rate Predictions

Despite the absence of pre-established cycles and the limited number of meetings set for the year, BofA now anticipates another reduction of 250 basis points in January. This forecast comes with the context that there will be no CBRT meeting scheduled for February. BofA continues to project that the policy rate will settle at 30% by the end of the year, anticipating seven reductions of 250 basis points.

Currency and Investment Perspectives

The analysts at BofA believe that Turkish lira (TRY) will remain an attractive option for savings this year, provided that positive real interest rates are maintained. There is an expectation for the TRY to appreciate in real terms, although the opportunity for this appreciation is expected to decrease as inflation continues to drop.

Revised Exchange Rate Forecast

Consequently, BofA has updated its year-end forecast for the USD/TRY exchange rate, expecting it to reach 41, a change from the earlier projection of 44. This adjustment reflects their outlook on the economic landscape and currency dynamics in Turkiye.

Frequently Asked Questions

What is the current inflation rate in Turkiye?

The current inflation rate in Turkiye for December is reported at 1.03%.

How does BofA view inflation risks in Turkiye?

BofA perceives limited inflation risk in Turkiye, anticipating a continued moderation in inflation rates.

What is BofA's forecast for the CRBT rate cuts?

BofA predicts further rate cuts by the CBRT, including a potential 250 basis point cut in January.

What changes has BofA made to its USD/TRY forecast?

BofA has revised its forecast for the USD/TRY exchange rate from 44 to 41.

What factors does BofA consider for currency stability?

BofA considers the maintenance of positive real interest rates as essential for the stability and attractiveness of Turkish lira savings.

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