Turkiye's inflation for December came in at 1.03%, which was lower than the consensus estimate of 1.6% and BofA's own forecast of 1.5%. The moderation in inflation was attributed to a decrease in unprocessed food prices, particularly fresh fruits and vegetables, which fell by 1.7% month-over-month after significant increases in the prior two months.
Additionally, food inflation slowed to 1.3% from 5.1%, and services inflation decreased to 1.1% from 1.6%. The core B-index, which excludes volatile items, also showed a slowdown in monthly inflation to 1.2% from 1.5%.
BofA economists highlighted that on a seasonally adjusted basis, headline inflation in Turkiye slowed to an average of 2.4% in the fourth quarter from 3% in the third quarter, and the B-index fell to 2.4% from 2.6%.
The report noted that the recent minimum wage increase, which was at the lower end of expectations, poses limited upside risk to BofA's inflation forecast of 25%. BofA also suggested that if administrative price changes align with expected inflation rather than being indexed backwards, inflation could be on the lower side.
Regarding monetary policy, BofA commented that the Central Bank of the Republic of Turkiye (CBRT) should continue its monetary easing policy with further rate cuts. The CBRT had reduced its policy rate by 250 basis points in December, as anticipated by BofA.
Despite a lack of a pre-determined cycle and fewer meetings scheduled for the year, BofA now expects another 250 basis point reduction in January. This prediction comes in light of the fact that there will be no CBRT meeting in February. BofA maintains its projection that the policy rate will drop to 30% by the end of the year through seven cuts in 250 basis point increments.
The bank's analysts believe that Turkish lira (TRY) savings will remain attractive throughout the year as long as positive real interest rates are preserved. They anticipate the TRY to appreciate in real terms, although they note that the potential for appreciation is diminishing as inflation declines.
Consequently, BofA has revised its year-end forecast for the USD/TRY exchange rate to 41 from the previous estimate of 44.
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