In Turkey, inflation rose to 61.1% in March, reaching its highest reading since 2002. We observe the dominating effect of the increase in energy prices on the side of direct consumption and costs in inflation, which is slightly above our 4% expectation on a monthly basis and is in the middle of the expectation range of market participants. In addition to the effect of the weak lira, rising commodity prices were the main drivers of inflation on a monthly basis, and when we evaluate it within the current conjuncture, it is likely that we will see the compelling effects of similar factors on inflation in the following months.
If we look at the sub-items of inflation; An increase is observed in all main expenditure groups. Annual producer inflation reached triple digits in the second month, and the core price index, which excludes food and energy items, rose to 48.2% compared to the previous year's forecast. Producer prices rose 9.2% this month, pushing the annual PPI to 115%. Rising ex-factory inflation levels continue to put upward pressure on consumer prices.
The impact of price increases seems to have had a broad-based and multi-component impact. Despite the tax cuts, energy inflation rose to 102.9% from 83% in February due to the increase in refined products and natural gas prices. The transportation sub-item, which includes most of the energy prices, has increased by 13.3% on a monthly basis. The annual increase of 99.1% in this item shows that transportation costs have almost doubled compared to a year ago. Considering that besides the direct effect of this, there will be a certain infiltration effect on other sub-items, the spillover effect of energy inflation may form the main basis of a broad-based rise in inflation. Food prices, which make up roughly a quarter of the consumer basket, have risen from 64.5% to 70.3% annually, and current war conditions pose the risk of a further increase in food inflation. As the items that showed a higher increase than the headline inflation, transportation stands out with 13.29%, education with 6.55%, restaurants and hotels with 6.04%.
In the coming period, we will see the effects of the natural gas hike in April. We calculate the direct inflation effect of the natural gas hike on the consumer side as 0.5 points. Of course, if we take into account the rate of increase made to producers, the pass-through effect on the PPI in the coming months will also increase the inflation coefficient. Therefore, the pass-through effect of producer costs on the prices of goods and services will be subject to a more tiered increase in inflation. We care more about the indirect effects of these factors on inflation than their direct effects, and we think that it will not help the general trend. As global commodity prices increase, the cost to be incurred here will increase even more. It should be noted that the hikes made are not limited to electricity, gasoline and natural gas, and that the effect of the sugar hike and the general increase in food prices will also be felt in April.
With the recent rise in inflation, the gap between Turkey's inflation and benchmark interest rates has reached 47.1%, by far the widest among the leading emerging markets. As the negative impact on real interest rates deepens, the attractiveness of holding Turkish assets and saving in TRY decreases and the lira becomes more vulnerable to external financial waves. Turkey's ultra-loose monetary policy is incompatible with the rising hawkishness of most of the world's central banks as its economy prepares for the commodity shocks unleashed by the Russian invasion of Ukraine. While Turkey's real interest rates were at minus 47.1%, the lira was already under pressure and had the second-worst performance against the dollar in March after the Russian ruble.
The most important variable is whether the Russia-Ukraine war will end, and if it will, under what conditions and when it will end. If the war ends soon, it can be expected that the commodity group, whose prices have increased rapidly in the last 2 months, will experience a price easing and ease the inflation pressure. If such a situation occurs, the current deteriorated future inflation expectations will also be lighter than before, but considering that the war is not the only cause of inflation in our country, but the creation and spread of inflation stemming from politics and local prices, it can be said that negative factors still predominate. Plus, energy subsidies mean we are lagging behind global price increases, so energy and energy input-related hikes will continue as global prices rise. The continuation of the Russian tension may indicate a global supply crisis, especially in energy. It poses a significant risk for energy and raw material importing countries like us.
While central bank policy has been on hold for 3 months, the government is trying to limit prices on some core products through a new value-added tax cut that will come into effect by April. However, the changes will likely not be more than a one-time measure effect for prices and will be insufficient to ease the overall pressure on inflation. It is tried to support the situation of the households whose real income decreased with the reduction of VAT on food to 1% before, and then with the VAT reduction on basic needs products, and whose access to these products is hindered. However, the inflation pressure on tax-free prices eliminates the effect of these discounts in the 60% inflation environment. The government is planning to tighten price controls in this regard.
Rate hikes are not on the agenda because of President Mr. Recep Tayyip Erdogan's goal of using cheaper lira to turn Turkey into a productive power. The decline in the lira, which has lost more than 9% of its value so far this year, makes imports more expensive and feeds inflation. Governor Mr. Şahap Kavcıoğlu said support for the local currency would be a key target this year, but gave little indication that this would require a tighter monetary policy stance. The expectation of policy makers is that both As Mr. Kavcıoğlu and the Minister of Treasury and Finance, Mr. Nureddin Nebati stated, a downward trend in inflation will begin as of the summer months. Currently, global Central banks are considering tightening steps to rein in the highest inflation rates of the last few years, including the ECB, which represents a region that will be directly exposed to the Russian crisis. The central bank, on the other hand, hopes to curb the price increase by taking side measures to encourage de-dollarization.
The next interest rate meeting will be held on April 14. We see that the main detail in the current decision text of the central bank is liraization. On the other hand, the fact that the current account surplus is no longer used in an environment where the liraization and disinflation process is referred shows that this phenomenon is not as reliable as before in terms of price stability. The dynamic here, of course, changed the war between Russia and Ukraine. We think that the Central Bank, which is in the process of evaluating many variables between the geopolitical crisis, commercial loans, economic activity, growth targets and rising inflation, will continue the waiting period and an rate hike has not been evaluated yet.
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