Inflation expectations continue to worsen

Inflation expectations continue to deteriorate, mainly due to the higher than expected reading at end 2015 and tax and wage hikes at the very beginning of the year. Survey participants expect inflation to end this year at 8.2%, while inflation expectations 12m and 24m ahead have increased sharply, to 7.92% and 7.12% from 7.56% and 6.86%, respectively. This is not good news for the inflation outlook, but we do not expect the CBRT to tighten monetary policy further; in fact, it is more likely to ease policy once global market conditions become more favorable.

The average cost of funding expectation climbed to 8.92% in the January survey from 8.84% the previous month. This was probably due to the recent increase in the CBRT’s average funding rate to 8.9%, though the CBRT lowered it again yesterday to 8.73%. On average, the market expects a 19 bps hike to the 1w repo rate at next week’s MPC meeting, versus a 28 bps hike expected ahead of last month’s meeting. Survey participants lowered their policy rate hike expectations for other periods as well, while they still expect the 1w repo rate to be increased. The projected rate hikes for 3m, 6m, 12m and 24m ahead stand at 8.09%, 8.41%, 8.56% and 8.46%, respectively versus 8.24%, 8.47%, 8.58% and 8.53% in the previous survey.

GDP growth expectation for this and next year further increased to 3.4% and 3.8% in January survey from 3.2% and 3.4% respectively in previous survey. They both got closer to our expectation of 3.5% and 4% for 2015 and 2015 respectively. Despite higher growth expectation, current account deficit expectations have sharply revised down to $34.3 bln from $39.0 bln for the end of 2016 probably due revised estimates based on lower oil prices. End year USD/TRY rate expectations in the meantime stood at 3.170, standing for 8.5% depreciation since end-2015 while 12-month ahead USD/TRY expectation was revised up from 3.104 to 3.231. Our end year USD/TRY expectation in the meantime is 3.20.