Türkiye | Fragile Disinflation, Narrow Room to Ease

Summary

Consumer inflation came in well above the market expectations at 3.2% m/m and 33.3% y/y. The deterioration in the underlying trend and its potential impact on still unanchored inflation expectations materially increase the likelihood of a year-end inflation of above 30%, also raising upside risks on the next year’s path.

Key points

• Key points:
• The upward surprise came from much higher than expected food inflation with a broad-based worsening, and core prices driven by both goods and services, where the former weighed more. Manufacturing producer prices also rose by 2.8% m/m, above our expectations, signaling stronger cost-push pressures.
• According to our calculations, seasonally adjusted consumer inflation rose to 2.7% (vs. 2.5% in August), led by the deterioration in core inflation, while its 3-month trend increased to 2.53% (vs. 2.37% in August). On the other hand, excluding education, seasonally adjusted slightly CPI improved on a monthly basis.
• The acceleration in seasonally adjusted monthly core inflation (Core C of 2.2% vs. 1.8% previously) stemmed from mainly basic goods (1.6% vs. 0.8%), whereas the services trend remained almost the same (closer to 2.8%).
• The uptick in the basic goods’ trend, still robust inertia in services inflation, and the deterioration in the average of six inflation-trend indicators on both monthly and three-month bases necessitate a cautious stance. Also, September inflation and 12-month ahead expectations stayed above the upper band of the CBRT’s forecast range, requiring the CBRT to react, given their ambitious 16% year-end target for 2026.
• Although we cannot fully rule out a pause in the October MPC to be held on Oct 23rd, given the easing bias seen in July and Sep meetings, we expect further reduction in the pace of cuts with 150 bps cuts in Oct and Dec, bringing the policy rate to 37.5% at the year end, followed by very gradual reductions in 2026, conditional on further disinflation gains.

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