Overall, February inflation, which was particularly impacted by food, led to a temporary increase in the annual figure, though the downtrend will likely resume in March. We raise our annual inflation forecast to 25% on the back of the elevated February inflation, leading to a higher path and ongoing pressure in energy prices. The uncertainty surrounding oil prices increases risks to the inflation outlook despite the possibility of a government decision to absorb some of the oil price shock via adjusting the tax on gasoline prices.
As a response to recent geopolitical developments, the CBT has taken several actions: providing FX supply to the system by actively utilising its FX reserves and starting lira-settled FX forward sales (NDF), reducing TRY supply that could go to FX. While FX sales have been reducing TRY liquidity in the system, it also started issuing liquidity bills, supporting demand for TRY. The bank suspended one-week repo auctions and allowed OIS rate to move higher to the upper band of the corridor.
We think the CBT will not change the policy rate in March, keeping it at 37%, then resume cautious cuts, pulling it to 30% at the end of this year, though risks are on the upside.