Sell-side Foresee Protracted Battle With Inflation

Following yesterday’s higher-than-expected inflation release, sell-side see risks of prolonged inflation battle, and some raise year-end repo rate forecast:

• Commerzbank write that even if prices were to go flat from current levels, year-on-year inflation will work out to be very high for an extended period of time, which will trigger second-round effects such as wage settlements. The risk is ever-present that Erdogan could lose patience and issue contradictory statements such as that “he never accepted that higher interest rates can bring inflation down”, undermining any attempts to rebuild credibility and the effectiveness of conventional policy would instantly be finished. Under those circumstances, no other economic variable or central bank policy will matter much for TRY performance.
• JP Morgan write that they expect inflation to peak at 73% in May 2024 (previously 70%) and end 2024 at 40% (previously 34%). They see upside risks to their year-end policy rate forecast of 35% now, and revise up our 2024 year-end policy rate forecast to 45% (previously 40%) as the CBRT is more sensitive to the inflation outlook.
• Goldman Sachs see CPI inflation closer to alternative price measures, such as the Istanbul Cost of Living Index, suggesting that some of the issues in the measurement of inflation are potentially being resolved. While they view this ultimately as positive, it does raise the upside risks to near-term inflation forecasts. They expect strong cost pressures to continue to drive inflation higher in the near term. Sizeable upside inflation surprises going forward, driven by price pressures and/or a methodological change in the way CPI is constructed, could raise the possibility of further material increases in the repo rate.