Turkey | June inflation opens the door for rate cuts

Consumer prices increased by 0.03% in June, lower than consensus but slightly higher than ours (0.2% Bloomberg vs. -0.15% BBVA Research). Supported by the base effects, annual inflation declined to 15.7% from 18.7% in May.

Key points

• Key points:
• Both food and energy prices were supportive, while core inflation maintained its improving trend by falling to 14.9% from 15.9% despite the stickiness in services prices.
• Electricity price hike as of July and removal of tax incentives on automobiles and some durable consumer goods will likely push inflation to 17-17.5% in July before falling very rapidly to near 10% in September to reverse thereafter.
• The recent appreciation in the currency thanks to both tight monetary policy and the risk premium reduction and still negative output gap could support further the disinflation path.
• Uncertainties over the pricing behavior, still high inflation expectations and backward looking inertia would require the Central Bank to be prudent in the magnitude of the easing cycle which we expect to start next July.

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