Macro and Politics

* Energy tariffs have been adjusted upward, reflecting rising cost pressures across both electricity and natural gas markets. The Energy Market Regulatory Authority (EPDK) announced that electricity tariffs have been raised due to rising generation and distribution costs. According to the statement, residential subscribers will face a 25% increase, while electricity prices for industrial users, as well as those in the public and private services sector, have been raised by 5.8% and 17.5%, respectively. In line with the wholesale natural gas prices announced by the state-run natural gas distributor BOTAŞ, final natural gas sales prices have also been increased by an average of 25% for residential users, 18.61% for industrial consumers, and 19.42% for electricity generation plants. Additionally, a tiered pricing system has been introduced for residential users. We calculate that the direct impact of the electricity price adjustment on headline inflation amounts to 0.32 percentage points, while the direct contribution from natural gas stands at 0.27 percentage points. We further estimate the indirect effects at around 0.21 percentage points for electricity and 0.18 percentage points for natural gas. We project that the direct impact of energy price adjustments will add approximately 0.6 percentage points to April inflation. Indirect effects are likely to materialize more gradually, potentially lifting the total impact to around 1 percentage point over time. These developments increase upside risks to the April inflation outlook. In addition, we expect the uptick in vegetable prices observed toward the end of March to carry over into April, while the four-month decline in clothing and footwear is likely to reverse on seasonal factors. Moreover, as the absorption capacity of the échelle mobile mechanism becomes increasingly constrained, fuel price adjustments are likely to be reflected more visibly this month. Taken together, following the downside surprise in March CPI, we expect a strong monthly inflation print in April (above 3%).

*The CBT will release March Real Effective Exchange Rate (REER) today @14:30 local time. Considering the inflation realizations and the average Basket/TRY change for March, we expect the REER to increase to 105.2, implying a 2% real appreciation of the Turkish lira.

* TURKSTAT will release March seasonally adjusted CPI and core CPI aggregates today @16:00 local time. Based on our calculations, we estimate that seasonally adjusted (SA) monthly CPI inflation came in at 2.07% in March, while CPI – B and CPI – C recorded increases of 2.08% and 2.17%, respectively. We expect the official adjusted figures to be broadly in line with our estimates.

* The CBT will release the Monthly Price Developments report for March 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.

* March CPI came in at 1.94% m/m, slightly below our house forecast of 2.1% and the market median of 2.3%. This implies that annual CPI eased from 31.5% to 30.9%. On the producer side, PPI rose by 2.3% m/m, with annual PPI increasing from 27.6% to 28.1%. The March print points to a marked deceleration in food inflation, in line with our estimates, following the elevated readings in the first two months of the year, while the pass-through from fuel price increases remained limited, supported by the 75% échelle mobile mechanism. That said, the balance of risks has shifted to the upside amid rising energy prices. The impact of fuel price increases on March inflation remained limited thanks to the 75% échelle mobile mechanism. However, as the mechanism approaches its effective limits and oil prices remain above USD100/bbl, we expect a more pronounced energy pass-through in April. In addition, rising energy costs – particularly in natural gas, urea, and other energy/petrochemical inputs – are likely to exert upward pressure on the overall price level via the producer price channel. Taken together, these dynamics point to a material upside risk to our year-end inflation forecast, with headline CPI likely to move above our previous estimate of 23% toward above 26%.