Downward trend in interest
June inflation came in line with expectations at 0.03 percent. Thus, with base effect of the 2.61 percent inflation data for June last year, 12-month inflation fell by three points from 18.71 percent to 15.72 percent. Unless the exchange rate remains under pressure in the coming months, this improvement can be expected to continue. In July-October 2018, the cumulative inflation was 11.8 percent. However, between 2005 and 2017, the cumulative inflation of these months was only three percent on average.
Of course, it is not possible for the markets to come back to the pre-2018 price dynamics. First of all, there is still a gap between CPI and D-PPI, which continues to hover about 10 points above the CPI. In a sense, it is also an indication that
producers still cannot reflect cost increases to final prices. In other words, businesses either had to work at a low profit or loss. Moreover, the high course of D-PPI has been continuing since June 2017, before the 2018 exchange rate crisis. The difference, which was initially more than 20 percent, has been around 10 percent since February.
In terms of long-term averages, it is not statistically possible to maintain a significant difference between CPI and D-PPI. Although as the increase in the D-PPI in abnormal sizes especially in August and September last year come out from the series the D-PPI will decrease more rapidly and will close up to the 12-month CPI. The relative increases in CPI in the following months will also affect the closing of the gap. In particular, with a shift in economic activity in the coming period, it will not be surprising that the price increases on the CPI side, which have not been realized until now due to market conditions, will come to the fore gradually. Of course, another increase channel in CPI will be due to the recent hikes to prices for managed/directed products. At this point, it should be taken into consideration that the increases in products such as electricity, fuel and sugar will have a secondary price increase effect by spreading to other sectors and products.
On the other hand, given the possible course of the inflation path as of today, we can see for sure that the Central Bank will cut interest rates in July. Depending on other developments, interest rate cuts will continue gradually in the coming months. However, these reductions should be shaped according to both monthly inflation developments and exchange rate movements. On the other hand, even if we assume that the recent hikes have a cumulative effect of 1.5, 1.0 and 0.5 percent on the monthly trend inflation in the next three months, the end-year inflation will fall to the 13-14 percent range. This would normally allow the Central Bank’s funding interest to be lowered to 17-18 percent by the end of the year, which is now just below 24 percent. If there is no hike in exchange rates by July 25, a 200 basis point reduction in the policy interest will not be a surprise in the first phase. A discount of 200-200-100 points gradually seems reasonable over the last three meetings until the end of the year.