Türkiye | May inflation eases though underlying pressures persist

Summary

Consumer inflation rose by 1.53% m/m, lower than both our expectation (1.8%) and the market consensus (2.0%), driving annual inflation down to 35.4%. We evaluate that the balance of risks on our 31% year-end inflation forecast become slightly tilted to the downside, depending on the overall stance of the policy mix.

Key points

• Key points:
• According to our calculations, seasonally adjusted (s.a.) monthly inflation improved considerably to 1.96% (down from 2.6% in March), led by mainly the slowdown in core goods inflation on weakening exchange rate pass-thru and domestic demand. As a result, 3-month average trend slightly improved to 2.35% in May (vs. 2.5% prev.).
• Services inflation also decelerated but to a lower extent, with a 3-month trend level of 2.8% while it is staying closer to 2% in the case of basic goods. Food inflation (s.a.) slightly accelerated to 1.5% m/m (vs. 1.3% prev.) on the back of unprocessed food, while energy inflation remained weak.
• Cost push impact remained relatively limited as manufacturing producer price inflation materialized as 1.72% m/m despite the headline producer price inflation of 2.48% m/m (vs. 2.76% prev.) due to the recent price hikes in the electricity and gas for industrial use.
• Unanchored inflation expectations, potential upward risks from agricultural frost on food inflation during summer, inertia on services inflation, and uncertainties over the fiscal stance continue to weigh on the inflation outlook, prompting the CBRT to likely maintain a cautious monetary stance despite May's weaker-than-expected inflation. We expect the easing cycle to start with a normalization in funding towards policy rate (46%) at some point in June together with some easing in macro-pru selectively, and to continue later with carefully calibrated cuts in the policy rate as of July.
• We remain prudent by maintaining our year-end inflation forecast of 31%, nonetheless, monetary policy becoming more restrictive, low trend of energy prices, and a better-than-expected inflation trend in recent months have increased the downside risks on our forecast.

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