Turkish inflation expectations for end-2017 declined to 9.49% in July from 9.55% in June, a central bank survey showed on July 17. Consumer prices, though, are forecast to rise by 0.18% m/m in July, down from the increase of 0.25% m/m anticipated in the June survey.

The deterioration in inflation expectations was driven by rising consumer prices and the depreciating Turkish lira. End-2017 inflation expectations deteriorated for eight months in a row from November to June.

In April, Turkey’s central bank revised up its end-year inflation expectation for 2017 to 8.5% from its previous forecast of 8%. The World Bank is forecasting a quickening of annual inflation to 9% at the end of 2017 from last year’s 8.5%.

Respondents in the central bank survey expected the USD-TRY rate to be 3.5851 by the end of July and 3.7492 at end-2017. The lira strengthened 0.28% d/d to trade at 3.5283 per dollar on July 17. The benchmark BIST-100 index rose 0.63% d/d to 105,842.

Turkey’s annual inflation rate fell to its lowest level in four months in June, easing pressure on the central bank to fight price growth. The rate retreated from 11.72% in May to 10.9% in June having hit 11.87% in April, a level which was the highest recorded since October 2008.

Markets' initial reaction to the latest inflation figure took the limited recovery as an early sign that the stabilisation of the Turkish lira in recent months is reducing pressure on prices. However, the IMF still predicts that Turkey’s CPI inflation will finish in the double digits, at 10.1%, for this year before declining to 9.1% in 2018.

S&P Global Ratings expects inflation in Turkey to moderate over the forecast horizon through the year-end of 2020, but it said in May that “given the lira's volatility, risks remain that the Turkish central bank's monetary policy response may prove insufficient to anchor its inflation targeting regime, particularly if domestic or geopolitical instability were to flare up in the coming months”.

Inflation will start falling in May and will end the year at 8.5% or below, Economy Minister Nihat Zeybeci predicted in April.

As inflation and exchange rate-related risks remain high, a direct increase in the policy rate is needed, the OECD said in its June Economic Outlook forecast as it raised its 2017 CPI inflation forecast for Turkey to 10.4% from its previous forecast of 7.7% given last November.

Faced with a sharp exchange rate depreciation and rising inflationary expectations, the monetary stance has been tightened, but explicit increases in the main policy rate are warranted, the OECD also warned.