Inflation and interest rates
December 2016 CPI s the h ghest n the ser es, .e. s nce 2003. January 2017 CPI s l kew se the h ghest n the ser es, and February also prov des a good base effect because February 2017 nflat on s the peak of the last seven years. We had better understand that these all-t me h gh rates d dn’t occur by fluke, rather they were a consequence of the exchange rate pass-through. If the l ra doesn’t deprec ate unt l then, t s almost mposs ble to reach such he ghts. Indeed, a comb ned December-January drop of 200 bas s po nts s a conservat ve est mate.
Do we have a surpr se here? Yes, CPI s h gher than h stor c averages. The 12-month mov ng average stands at 9.66%, 132 bas s po nts h gher compared w th August 2016. That squares w th our observat on that trend nflat on now hovers around 8%, 150 bas s po nts h gher than ts past mean. If nflat on reverts to ts mean, t w ll revert to c. 8%. But August nflat on s rather w despread across sub tems. It looks l ke October s key s nce we cont nue to expect a drop of over 100 bas s po nts n annual nflat on n December, on top of wh ch there s January nflat on w th a favourable base effect. Those two months are bound to produce a ben gn effect on headl ne CPI. There s potent al for a 200-bas s-po nt fall n nflat on comb ned.
S nce March and Apr l are also months w th a meagre but st ll pos t ve base effect, the quest on of nterest rate pol cy m ght surge then and come to the forefront. We approach the ssue caut ously because th s s exactly the t me frame when both the Fed and the ECB w ll truly del ver – not only ssue clear s gnals – and may actually perform beyond forward gu dance. Otherw se, n Q1 2018 there may come an nter m per od when t could be opt mal for the Central Bank of Turkey to cut the effect ve fund ng rate. We are st ll unclear about the modal t es of a f scal/ monetary pol cy m x sw tch, but ft can be done, ts lkely n Q1 2018 more than any other t me.