Growth rate is not the only macroeconomic indicator which is hard to estimate for 2012. Currently, it is even difficult to estimate the inflation outlook.

Inflation figures for February were announced. Annual consumer price inflation decreased slightly to 10.4 percent. Core inflation, which is a stronger indicator for inflation dynamics, eased month on month from 8.4 to 8.1 percent. In January and February, therefore, inflation matched expectations as well as the projections of the Central Bank of Turkey (CBT).

We are surrounded by uncertainties. The unfavorable outlook which was suffered during the second half of 2011 was replaced by a more favorable one thanks to the liquidity measure introduced by the European Central Bank, in particular. If this outlook prevails, the following will be the realistic outlook to expect:

The rise in the risk appetite driven by the favorable outlook might put an upwards pressure on the value of Lira. This is good news concerning inflation dynamics alone. Again, there is no need to expect a sharp drop in capital movements as we have feared before. We might witness a drop compared to 2010 and the first half of 2011, but a sharp decline is not probable. Accordingly, growth in 2012 might match with what was estimated in the Medium Term Program. Although the rate will probably not decrease severely, we will face a significant year-on-year drop, which eliminates a strong demand pressure on prices. This would ease the inflation pressures further. On the other hand, the recent upwards move in oil prices will put an upwards pressure on inflation.

The net effect from these three channels will probably be downwards. In line with the CBT prospects, we might witness a remarkable drop in inflation rate during the second half of the year. At the end of 2012, inflation will most likely be above the target, but below the current level. It is not easy to estimate what the rate will exactly be at the end of the year, given the uncertainties. But it might reach the 7-8 percent interval.

Let me remind here that the above picture assumes that the current positive mood will prevail. Moreover, let me stress that the current mood is positive compared to the second half of 2011. Also, it is useful to keep in mind that the actions of the European Central Bank, which were the main determinant of the positive mood, did not solve Europe’s key problems but just saved time for European leaders.

Then, what if the mood is reversed? As this means a fall in risk appetite, foreign fund inflows to Turkey will decrease and exchange rate will increase. This will cause an upwards pressure on inflation. On the other hand, due to the drop in growth rate, demand pressure will ease further, pushing inflation down. Which of this opposite effects prove stronger? We have to expect that the exchange rate impact will be stronger. That is, inflation rate will not fall below the current rate.

In a nutshell, growth rate is not the only macroeconomic indicator which is hard to estimate for 2012. Under the current circumstances, it is even difficult to talk about inflation dynamics, which are normally easier to project.

This commentary was published in Radikal daily on 06.03.2012