Macro and Politics

*The CBT will release February Real Effective Exchange Rate (REER) today @14:30 local time. Considering the inflation data and the average Basket/TRY change for February, we expect the REER to rise slightly to 75.5 in February from the previous month's 75.4, implying a limited appreciation of the Turkish lira. If the release aligns with our estimate, this would represent the lowest real appreciation of the lira since August.

* TURSTAT will release February seasonally adjusted CPI and special CPI aggregates today @16:00 local time. Based on our calculations, we forecast the seasonally adjusted monthly CPI change for February to be approximately 2.1%. We expect a similar outcome in today’s adjusted figures.

* The CBT will release the Monthly Price Developments report for February today @18:00 local time. The report is a technical one and does not contain a policy message. Still, the assessment of trend core inflation will be monitored closely.

* The CPI recorded a monthly increase of 2.3% in February, with the annual CPI easing further to 39.05% from 42.1%. The realization is below both our house forecast and market median estimate. The PPI, moreover, increased by 2.1% m/m, with the annual PPI sliding from 27.2% to 25.2%.The February CPI rise was below both our in-house forecast of 3.1% and the median expectation of 3%. It’s worth noting that following the recent retroactive reduction in medical examination copayments, which had been imposed in mid-January and significantly contributed to the sharp rise in January CPI figures as well as the upward revision of the CBT’s year-end inflation forecasts, inflation expectations for February experienced a notable decline towards 3% from approximately 4%. The outcome, coming even below expectations, has been positively priced by the markets, strengthening the expectations for a 250bps cut at Thursday’s MPC meeting. We continue to anticipate a 250bps cut at both the March and April meetings. Our year-end CPI forecast stands at 28%, and we expect the policy rate to be at 30%.

* Following the weak performance observed in leading indicators in January, the data for February point to a renewed improvement in activity. The Istanbul Chamber of Industry (ICI) Turkey Manufacturing PMI rose slightly to 48.3 from 48 in February. However, the index remained below the critical 50 threshold for the 11^th consecutive month, continuing to signal contraction. Recall that after rising to 49.1 in December, the PMI sharply declined to 48 in January. While the index showed a modest improvement in February, it is important to highlight that, on the whole, activity in the manufacturing sector continues to exhibit a contractionary trend. Meanwhile, the Bloomberg HT Consumer Confidence Index, one of the key leading indicators for growth, climbed 6.3% m/m to 77.1 in February, recovering from a decline in January. Additionally, the MUSIAD SAMEKS (PMI) Index, which we also monitor for growth dynamics, increased by 3.1 points to 51.9 in February. In light of the weak performance in leading indicators in January, the data for February suggest a renewed improvement in activity. Our baseline scenario for 2025 foresees a decline in annual growth in the first quarter, followed by a recovery in activity starting from the second quarter, with a projected growth rate of 2.6% for the year. However, the preliminary data to date suggests that the expected weakness in growth during the first quarter may not materialize, and the trajectory of growth dynamics may continue to pose a risk factor for the disinflation process.