There is substantial uncertainty stemming from several factors pressuring the core indicators, both to the upside and downside. On one hand, we have slowing economic activity with faster than expected rise in unemployment is easing inflationary pressures. On the other hand, TRY depreciating trend which has steepened recently is expected to keep on fueling Inflation.

Broader Inflation Expectations are, give or take, 100 basis points above the inflation level targeted by the Turkish central bank for 2017. This, in our view, signals that expectation are not anchored yet, which in itself poses risks to actual inflation. The weakening trends in the TRY depreciation picked up the pace in the last few weak weeks could increase pressure on inflation. We previously stated that we had expected TRY to reach 3.20 (versus the US dollar) by 2016-year end, which now seems to be overshot, thus leading us to raise our target to 3.30. Turkey’s historically high FX-pass through will eventually pose upside risks to inflation expectations. For instance, on the headline inflation front, the weaker TRY already has resulted in the need for gasoline price adjustments. Overall, we expect core inflation (I-index) to hit 9% in Q1 2017, taking us ahead of the curve.